Loss of Exclusivity (LOE) Management for Branded Products Returns Forecasting

Monday, March 4 | 3:30 PM-4:30 PM

Ed Crimmins, Partner, Kindler & Crimmins Associates, LLCSteve Kindler, Partner, Kindler & Crimmins Associates, LLC

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Session Objectives

• Discuss the impacts of Loss of Exclusivity (LOE) events

• Review HDMA’s LOE: An Inventory Management Case Study report– Project overview– Challenges– Findings

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LOE Event Definition

A branded pharmaceutical product with an expiring patent is facing new competition from

one or more generic manufacturers selling equivalent product at a fraction of the cost of

the branded product.

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Why Study LOE Events?

• The ‘Patent Cliff’-– Drugs having $77bn in annual 2010 US sales will

undergo an LOE event during the next 10 years • Over 82% of that number going in the next 5 years. *

– 27 significant drugs were scheduled to lose patent protection and marketing exclusivity in 2012 and another 14 in 2013**

* Non-Foods Magazine, “Drug Patent Expirations”, Volume 15 No. 1 2012-2013, Pgs. 153-154.** 2011-2012 HDMA Factbook, “Table 95 Brand Patent Expirations: 2012-2013”, 2011, Pgs. 84-85.

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LOE Impact by Year

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021$0

$5

$10

$15

$20

$25

$30

$26.1

$6.0

$12.1

$10.4$8.8

$2.2 $1.9$3.0

$3.7$2.4

Drug Patent Expirations

2010

US

Sale

s ($

bill

ions

)

Source: “Drug Patent Expirations”, Non-Foods Magazine, Volume 15 No.1 2012 – 2013, 153-154.

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LOE Conversion

• In 2006, branded drugs accounted for 36.6% of the prescription count and 80% of the prescription sales dollars.*

• By 2010, the branded prescription count had dropped to 22.4% while the prescription sales dollars dropped to 74.6%.*

• The pace of this movement is dependent on many factors, but is quickening with almost every LOE event.

* 2011-2012 HDMA Factbook, “Table 89 US Prescription Drug Market Share by Generic and Branded Pharmaceuticals: 2006-2010”, 2011, Pg. 79.

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Historic LOE Business Model

• Leverage robust pipeline to replace negative sales impact of LOE– Pipelines can no longer be counted on to replace LOEs

• Sell what you can while you can– Future impact of returns not fully considered or

appreciated- “We’ll worry about that when the time comes.”

• Increase product cost to offset sales decline– Historic price increases may contribute to ‘investment’

or speculative buying of LOE product

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Significant Financial Impact

• LOE accelerates and magnifies the impact of reduced demand

• Options are limited once generic hits the market– Merchandise will often sit until it expires

• All stakeholders have a shared goal– Increase inventory productivity – Reduce product returns– No negative impact on sales or customer service

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Project Beginnings

• Return Roundtable – Held at conclusion of 2011 Product Lifecycle Management seminar – Goal to identify case study opportunities based on the

‘Understanding the Drivers of Expired Pharmaceutical Returns’ report

• Loss of Exclusivity – Overwhelmingly identified as the greatest potential case study

opportunity– Presents an opportunity for a collaborative effort between all

trading partners• ‘LOE: An Inventory Management Case Study’ project was

commissioned by HDMA

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LOE- An Inventory Management Case Study Goal

To help trading partners better communicate and manage inventory before and after LOE

event, ultimately reducing unproductive inventory and eventual unsalable / outdated

return volume.

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LOE- An Inventory Management Case Study Overview

• An exploration of how trading partners may be able to better communicate (both internally and externally) in order to improve management of the typical LOE sales and return trends

• Based upon an analysis of historical LOE events, the report identifies strategies a company can use with its trading partners to mitigate onhand inventory levels and reduce the volume of future expired product returns

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LOE- An Inventory Management Case Study Overview

• The report is solely focused on analyzing and developing successful strategies for fixed date LOE events

• ‘At risk’ launches do not allow trading partners to prepare for and execute pre-launch activities aimed at proactively reducing and managing inventory levels

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Any Surprise?

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Questions We Hoped to Answer

• Is a collaborative model between the manufacturer, distributor, and retailer possible?

• Can an LOE event be managed and controlled by following a structured, well communicated plan?

• Do data and findings support established assumptions and theories?

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Background

• Manufacturer and distributor members of the HDMA’s Returns Task Force, along with representatives of retail pharmacies provided subject matter expertise and / or data for the report

• Kindler & Crimmins Associates (KCA) acted as the clearing house for the collection of data and information

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Background

• KCA compiled and analyzed the data and authored the report

• Due to the sensitivity of the subject matter and the proprietary nature of the data and information provided– All data has been de-identified.– No participating companies are identified in this

presentation or the final report.

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Sources of Information

• Manufacturers– LOE Product and Attribute Information – Sales and Return Data– Process Interview

• Distributors– Sales and Return Data– Process Interview

• Retailers– LOE Event Process Questionnaire– Process Interview

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Why Retail Focused?

• Inventory Management Agreements between manufacturers and distributors have successfully reduced inventories while providing increased visibility to distributor inventory

• Most manufacturers and distributors have identified retail returns as the ‘black hole’

• Retail pharmacies (chain, mass, independent and food stores) represent approximately 55% of the pharmaceutical market share (2010 sales dollars)*

* 2011-2012 HDMA Factbook, “Table 109 Pharmaceutical Sales by Customer Categories: 2009-2010”, 2011, Pg. 79.

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Retail Process Information

• Participating retailers were asked to complete an LOE Event Process Questionnaire

• The responses detailed significant retailer handling variations that appear to have impacted product return rates

• This information was extremely helpful in identifying successful practices that resulted in lower rates of returns

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Retail Process: Prior to LOEQuestion Response

Do you quantify, track and monitor inventory levels (value, days/weeks on-hand) for brands facing future LOE? 

Yes- 3 retailers No- 3 retailers

Do you communicate upcoming LOE events with pharmacies? 

Yes- All retailers

If ‘yes’, how far in advance do you notify them?

Less than one week prior- 1 retailer One month prior- 2 retailers More than one month prior- 1 retailer Supply/velocity based prior- 2 retailers

If you warehouse branded pharmaceuticals, when do you begin reducing purchases for the branded item facing LOE?

Discontinue prior to LOE- 1 retailer Supply/velocity dependent- 2 retailers One month prior- 1 retailer Not applicable- 2 retailers

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Retail Process: Prior to LOEQuestion Response

Do you manage, systematically limit or restrict replenishment for pharmacy purchases of brands facing LOE? 

Yes- 4 retailers No- 2 retailers

For brands facing LOE that are located in automated dispensing machines, what specific steps, if any, do you take to manage this inventory?

Suggest removal from machineso No time specified- 1 retailero Less than 1 month prior- 1 retailero 1-2 months prior- 2 retailers

Not applicable- 2 retailers

Do you have any discussions with manufacturer of branded item facing LOE?

Yes- 3 retailers No- 2 retailers Only if onhand is excessive- 1 retailer

If ‘yes’, what information and data is requested and provided?

Return requested- 2 retailers Data analysis and sales program- 1

retailer No information- 3 retailers

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Retail Process: Post LOEQuestion Response

Do you communicate LOE events with pharmacies? 

Yes- 6 retailers

If ‘yes’, what are your instructions or communications comprised of?*

Monitor orders- 2 retailers Return / transfer excess inventory- 4

retailers Promote benefits of generic- 2 retailers Remove from automation- 1 retailer

If you warehouse branded pharmaceuticals, do you accept pharmacy returns back to the warehouse? 

Yes- 4 retailers Not applicable- 2 retailers

If you warehouse branded pharmaceuticals, when do you discontinue warehousing/distributing the branded item?

Discontinued prior to LOE- 1 retailer Once salable returns are sold through or

all onhand becomes short-dated- 3 retailers

Not applicable- 2 retailers

* Total is greater than 6 since retailers communicate multiple messages related to this topic.

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Retail Process: Post LOEQuestion Response

Are you able to return salable (full, sealed, pristine) product for brand impacted by LOE to your warehouse?

Yes- 4 retailers 

Are you able to return salable (full, sealed, pristine) product for brand impacted by LOE to your wholesaler? If ‘yes’, are there any limitations? 

Yes- 6 retailerso Limitations based on product

dating.

Are you able to return salable (full, sealed, pristine) product for brand impacted by LOE to the manufacturer? If ‘yes’, are there any limitations? 

Yes- 1 retailero No limitations noted.

No- 2 retailers Sometimes- 3 retailers

o Dependent on situation

How do you handle residual partial bottles for brands impacted by LOE? 

Transfer internally- 3 retailers No transfer, hold until expired- 3

retailers

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Retail Process: Post LOEQuestion Response

Do you have an internal product re-distribution program that could be used to handle residual inventory for brands impacted by LOE? 

Yes- 5 retailers No- 1 retailer

Do you manage or restrict pharmacy purchases for brands impacted by LOE? 

Yes- 2 retailers No- 4 retailers

Do you quantify, track and monitor inventory levels (value, days/weeks on-hand) for brands impacted by LOE?

Yes- 6 retailers

Do you have any discussions with manufacturer of branded item impacted by LOE?

Yes- 2 retailers No- 2 retailers Only if onhand is excessive- 2 retailers

If ‘yes’, what information is requested and provided?

Return requested- 2 retailers Inventory information and return

request- 1 retailer No information- 3 retailers

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Data Analysis

• Background for the LOE Event– Specific information for each product

• Sales and Return Analysis– Illustrate the timing and pace of sales decline related to the LOE

date– Establish the return baseline prior to LOE

• Retailer Returns– Total Returns

• Illustrate the total returns (raw dollars) for each participating retailer

– Adjusted Returns• Illustrate the return rate, adjusted for company pharmacy sales, for

each participating retailer

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Product 1 Analysis

Background information:• Manufacturer handling:

– No inventory management plan • Generic competition:

– Multisource immediately• Product dating at LOE:

– ‘Normal’ dating- 18-24 months of shelf life

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Product 2 Analysis

Background information:• Manufacturer handling:

– Basic inventory management plan • Generic competition:

– Single source initially• Product dating at LOE:

– ‘Long’ dating- 30+ months of shelf life

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Product 3 Analysis

Background information:• Manufacturer handling:

– ‘Aggressive’ inventory management plan • Generic competition:

– Single source initially• Product dating at LOE:

– ‘Long’ dating- 30+ months of shelf life

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Product 4 Analysis

Background information:• Manufacturer handling:

– ‘Aggressive’ inventory management plan • Generic competition:

– Single source initially• Product dating at LOE:

– ‘Long’ dating- 36+ months of shelf life

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LOE Management Challenges- Manufacturer

• Retail sales data limitations

• Lack of pharmacy level inventory information • LOE date is known, but not necessarily the entrance date

of LOE competitors

• Retailer identification of return data

• Completeness of return information

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LOE Management Challenges- Distributor

• Completeness of purchase information

• Completeness of return information

• Evolution of data warehousing and reporting

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LOE Management Challenges- Retailer

• Pharmacy specific inventory may not be captured or available at the NDC level

• Lot and expiration information is generally not captured or tracked at the pharmacy level

• Lack of available data

• There is a significant disparity in inventory productivity between pharmacies

• Certain product attributes may limit ability to transfer excess inventory– DEA Scheduled products– Refrigerated products

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LOE Management Challenges- All Trading Partners

Other Factors Impacting Conversion:

– Single-source vs. Multi-source generic

– Acute vs. Maintenance

– Titrated and neurologic product

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Project Findings

Key elements in successful programs:

– Planning

– Communication

– Measurement

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Project Findings

Planning

– Planning should be initiated far in advance of the LOE event to create detailed handling plan

– All affected internal departments and stakeholders should be involved.

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Project Findings

Communication

– Internal communications to avoid departments working in silos and at cross-purposes

– External communications to ensure that each trading partner is aware of the plans of the other trading partners

– Includes the sharing of both information and data on a regular basis before, during and after the LOE event

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Project Findings

Measurement

– Establish a baseline that all can agree upon. – Regularly measure progress and performance.

– Allows trading partners to assess their respective performance against their plan.

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Successful Management Illustration

• Manufacturer informs distributor/retailer of LOE and relevant dates

• Each trading partner holds internal meetings to develop handling plans

• Distributor/retailer share inventory information and handling process with manufacturer

• Replenishment orders closely monitored

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Successful Management Illustration

• Retailer communicates conversion and inventory information with manufacturer

• Retailers utilize all available return and redistribution opportunities

• Manufacturer works with distributor/retailer to address non-moving, residual inventory prior to product expiration

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• Aggressive replenishment management prior to LOE– Inventory reduction– Potential out of stock situations

• Shift of responsibility– Limit return liability through policy changes– Retailers bear burden– Does not reduce inventory or future return volume

• Continued sales effort– Increased sale of branded inventory– Inventory and return impact not known at this time

Other Manufacturer Approaches

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Conclusion

There is no silver bullet!

• Each LOE event has its own unique circumstances that must be considered

• There is no ‘one size fits all’ approach that will work for every situation

• Proactive planning and sharing of information is critical

• Anticipate obstacles and challenges and adjust plans accordingly

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Closing

• Questions?

• Report copies will be available through HDMA

• Contact Information:– Steve Kindler

• 717-439-1954, skindler@kindler-crimmins.com

– Ed Crimmins• 717-884-6128, ecrimmins@kindler-crimmins.com

– Website• www.kindler-crimmins.com