Tag Archives: accuracy

Relevance Of Outliers In Pharma Sales Forecasting

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Just like any other predictions or forecasting – on a broader sense, pharma sales forecasts are also a tough and tedious task. Availability of many sophisticated state of the art digital software tools and techniques, notwithstanding.

In an article, published in the July-August 2007 issue of Harvard Business Review (HBR), Paul Saffo – a forecaster based in Silicon Valley, California – expressed this point succinctly with a nice example. He said: “Prediction is possible only in a world in which events are preordained and no amount of action in the present can influence future outcomes. That world is the stuff of myth and superstition. The one we inhabit is quite different—little is certain, nothing is preordained, and what we do in the present affects how events unfold, often in significant, unexpected ways.”

At this point, I would respectfully prefer to slightly alter the last sentence of the quote as, “….and what we and (others) do in the present affects how events unfold, often in significant, unexpected ways.”  This is important to me, as we may have control over what ‘we do’, but may not have much control over what ‘others do’ in the present, which may also greatly affect how events unfold, often in significant, unexpected ways.

However, the author distinctly differentiates predictions from forecasts by clarifying that prediction is concerned with future certainty, whereas forecasting looks at how hidden currents in the present, signal possible changes in direction for companies. Thus, unlike a prediction, a forecast must have a logic to it and the forecasters must be able to articulate and defend that logic.

My own hands-on experience in the domestic, as well as the pharma industry of the western world tells me that the actual sales and profit may seldom be a replica of the respective forecasts for the same. However. a reasonably good forecast is the one that is much closer to reality.

That said, it is important to note in the same context, what the above HBR paper has said, in this regard. The author underscores whether a specific forecast actually turns out to be accurate is only part of the picture. Citing a nice simile it says, even a broken clock is right twice a day. Thus, the forecaster’s one of the key tasks is to map uncertainty where our actions in the present influence the future. Uncertainty is an opportunity, he articulates.

In this article, I shall try to explore the possible reasons why, despite the availability of so many sophisticated digital software tools and techniques, the reality in most cases is much different. In a significant number of occasions, the actual sales is much less than the sales forecasts.

The criticality of forecast accuracy:

As we know, sales forecasts today are generally data pooling or consensus forecasts for better buying-in by the implementer, as there exists a critical need, just not to deliver closer to the forecasts, but to exceed the same, especially for the new products.

One will get the flavor of criticality of sales forecast accuracy from the McKinsey research study titled, “The Secret of Successful Drug Launches”, published in March 2014. It found that two-thirds of the sample group of drug-launches failed meeting pre-launch sales forecasts in their very first year on the market. The sample for this study comprised 210 new drugs launched between 2003 and 2009, for which McKinsey gathered necessary consensus-forecasts data for launch from EvaluatePharma. Three important findings of this EvaluatePharma – McKinsey analysis may be summed up, as follows:

1. Actual sales during the first year of launch as % of sales forecast one year before launch:

  • % of launches below forecasts: 66
  • % of launches on or near forecasts: 8
  • % of launches exceeded the forecast: 26

2. Of launches that exceeded the forecasts in the year 1:

  • 65% continued to do so in the year 2
  • 53% of those exceeded forecasts in the year 3

3. Of launches that lagged forecasts in the year 1:

  • 78%continued to do so in the year 2
  • 70% of those lagged forecasts in the year 3

In an eloquent way, this study highlights the benefits of sales forecast accuracy for a sustainable performance excellence, especially with new products.

Wide room for improvement in forecasts:

Although, my focus in this article will be on sales revenue forecasts, there is a wide room for improvement in other related forecasts, as well.

Another interesting article titled, “Outsmart Your Own Biases”, appeared in the May 2015 issue of the Harvard Business Review revealed, when researchers asked hundreds of chief financial officers from a variety of industries to forecast yearly returns for the S&P 500 over a nine-year horizon, their 80% ranges were right only one-third of the time. The authors considered it as a terribly low rate of accuracy for a group of executives with presumably vast knowledge of the economy of the United States.

The study further indicated that projections are even further off the mark when people assess their own plans, partly because their desire to succeed skews their interpretation of the data.

Such a scenario prompts the need of yet greater application of a mix of creative and analytical minds to ferret out the reasons behind general inaccuracy in forecasting, which incidentally does not mean setting out an easy target, and then exceeding it. Right sales forecasting with high accuracy, is expected to make use of every potential future opportunity in the best possible way to achieve continuous excellence in performance.

Analyzing outliers in consensus forecasting:

A recent paper deliberated on this area backed by some relevant case studies to capture the relevance of outliers in consensus-forecasting for the pharma companies.

The 2017 study of EvaluatePharma, titled “The Value of Outliers in Consensus Forecasting” flagged some important points. It also asked, are we questioning the level of agreement or disagreement, while leveraging each estimate for consensus forecasts?

However, in this article, I shall highlight only on the relevance of outliers in pharma sales forecasting, and keep aside the question on the level of agreement or disagreement while leveraging each estimate for consensus forecasts, for another discussion.

As many of us have experienced, there will always be outliers in most of the consensus forecasting process, which are usually removed while arriving at the final numbers. Nonetheless, this article brings on to the table the importance of outliers who, on the contrary, can provide an insightful view, especially in those areas with more upside potential and downside risk.

Just to recapitulate, an outlier is a data point that lies at an abnormal distance from other data points, which in this case is data related to consensus-forecast. This divergence can be either very high or very low. Which is why, outlier removal is a common practice, as it is considered as bad data by many. Nonetheless, before singling out and elimination of outliers, it will be a good idea to analyze and understand the exact reasons behind the same.

The above paper also indicates that combining consensus forecasts with the analysis of outliers will enable the pharma companies:

  • To better balancing risk and upside
  • Improving accuracy of new product selection

Conclusion:

Just as in any business, for pharmaceuticals too, sales forecasting holds a crucial importance, having a far-reaching impact. This is primarily because, many critical decisions are taken based on sales forecasts, such as internal revenue and capital budgeting, financial planning, deployment of sales, marketing and other operational resources, including supply chain, to name a few. All these, individually and collectively, necessitate that sales forecasts, especially for new products, should be of high accuracy.

One of the recent trends in this area, is pooling or consensus forecasts, though, it is not free from some criticism. The recent EvaluatePharma study, as quoted above, clearly demonstrates that this approach helps increase forecast accuracy, especially in situations with a high degree of uncertainty.

The upper and lower bounds of consensus known as outliers, may often identify potential upside or downside events that could significantly affect the outlook of a pharmaceutical company.

With this perspective, it now clearly emerges that in-depth analysis of outliers is of high relevance to improve accuracy of pharma sales forecasts, in a significant way.

By: Tapan J. Ray 

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.

New Drug Price Control Order of India: Is it Directionally Right Improving Access to Medicines?

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The last Drug Policy of India was announced in 2002, which was subsequently challenged by a Public Interest Litigation (PIL) in the Karnataka High Court on the ground of being inflationary in nature. The Honorable Court by its order dated November 12, 2002 issued a stay on the implementation of the Policy.

This judgment was challenged by the Government in the Supreme Court, which vacated the stay vide its order dated March 10, 2003 and ordered as follows:

“We suspend the operation of the order to the extent it directs that the Policy dated February 15, 2002 shall not be implemented. However we direct that the petitioner shall consider and formulate appropriate criteria for ensuring essential and lifesaving drugs not to fall out of the price control and further directed to review drugs, which are essential and lifesaving in nature till 2nd May, 2003”.

As a result DPCO 1995 continued to remain in operation, pending formulation of a new drug policy as directed by the honorable court.

In the recent years, following a series of protracted judicial and executive activities, the New National Pharmaceutical Pricing Policy 2012 (NPPP 2012) came into effect on December 7, 2012. In the new policy the span of price control was changed to all drugs falling under the National List of Essential Medicines 2011 (NLEM 2011) and the price control methodology was modified from the cost-based to market based one. Accordingly the new Drug Price Control Order (DPCO 2013) was notified on May 15, 2013.

However, the matter is still subjudice, as the new policy would require to pass the judicial scrutiny.

In this article, I shall try to explore whether the new DPCO 2013 is directionally right in improving access to medicines for a vast majority of population in the country .

An overview:

As stated above, the new DPCO 2013 has just been notified after an agonizing wait of about 18 years, bringing all 652 formulations under 27 therapeutic segments of the National List of Essential Medicines under price control.

As prescribed in the Drug Policy 2012, in the new DPCO the cost based pricing mechanism has been replaced with a market-based one, where simple average price of all brands with a market share above 1% in their respective segments will be considered.

Only decrease in price and no immediate increase:

Companies selling medicines above the new Ceiling Prices (CP), as will be notified by the National Pharmaceutical Pricing Authority (NPPA) soon, would have to slash prices to conform to the new CP level. However, those selling these scheduled drugs below the ceiling price will not be allowed to raise prices, resulting in significant price reduction of most essential drugs with price increases in none. Prices of all these formulations will be frozen for a year. Although a silver lining is that manufacturers will be permitted an annual increase in the CPs in line with the Wholesale Price Index (WPI).

The span:

The span of DPCO 2013 will cover approximately 18% of US$ 13.6 billion domestic pharmaceutical market. However, the total coverage will increase to around 30%, for a year, after coupling it with existing price controlled medicines, as these will continue with the current prices for a year.

No change in retail margin:

DPCO 2013 continues with the provision of DPCO 1995, fixing margin for the Retailers at 16% of Ceiling Price, excluding Taxes.

Benefit to consumers:

Indian consumers will undoubtedly be the biggest beneficiaries of the new DPCO, as ceiling prices will now be based on roughly 91% of the pharmaceutical market by value, resulting upto 20% price reduction in 60% of the NLEM medicines. The prices of some drugs will fall by even upto 70%.

Overall impact:

In the short-term, Indian pharma market may shrink by around 2.3 per cent on implementation of the new policy, according to an analysis by market research firm AIOCD AWACS. The impact could be more pronounced for multinationals, given their premium pricing strategy for key brands. For the patients, anti-infective, cardio-vascular, gastro-intestinal, dermatology and painkillers would witness relatively steeper drop in prices.

However, despite initial adverse impact, higher volume growth over the next few years may help the pharmaceutical companies to recover and pick-up the growth momentum.

More transparent and less discretionary:

Moreover, the industry reportedly feels that the shift in the methodology of price control from virtually opaque and highly discretionary cost based system to relatively more transparent market based one, is directionally right and more prudent. They point out, even WHO in its feedback to the Department of Pharmaceuticals welcomed the intent to move away from cost-based pricing as it has been abandoned elsewhere.

The drafting of DPCO 2013 also appears to have reduced the discretionary criteria for the National Pharmaceutical Pricing Authority (NPPA) to bare minimum.

Check on any essential drug going out of market:

DPCO 2013 has tried to prevent any possibility of an essential drug going out of the market without the knowledge of NPPA by incorporating the following provision in the order:

“Any manufacturer of scheduled formulation, intending to discontinue any scheduled formulation from the market shall issue a public notice and also intimate the Government in Form-IV of schedule-II of this order in this regard at least six month prior to the intended date of discontinuation and the Government may, in public interest, direct the manufacturer of the scheduled formulation to continue with required level of production or import for a period not exceeding one year, from the intended date of such discontinuation within a period of sixty days of receipt of such intimation.” 

Patented Products:

DPCO 2013 does not include pricing of patented products, as the Department of pharmaceuticals (DoP) has already circulated the report of an internal committee, specially constituted to address this issue, for stakeholders’ comments.

Encourages innovation:

The new DPCO encourages innovation and pharmaceutical R&D offering significant pricing freedom. It states all locally developed new drugs, new drug delivery systems and new manufacturing processes will remain exempted from any price control for a five-year period.

Implementation:

Interestingly, the changes in prices will be effective after 45 days (15 days in the earlier DPCO 1995) from the date of  respective CP notifications. This increased number of days is expected to allow the trade to liquidate stocks with existing prices.

However, the industry feels that its hundred percent implementation at the retail level, even within extended 45 days, for previously sold residual stocks lying in remote locations, could pose a practical problem.

The Government reportedly answers to this apprehension by saying, the provisions and wordings for implementation of new CPs in DPCO 2013 are exactly the same as DPCO 1995. Only change is that the time limit for implementation has been extended from 15 days to 45 days in favor of the industry. Hence, those who implemented DPCO 1995, on the contrary, should find effecting DPCO 2013 changes in the CPs much easier.

Opposite views:

  • Reduction in drug prices with market-based pricing methodology is significantly less than the cost based ones. Hence, consumers will be much less benefitted with the new system.
  • A large section in the industry reportedly does not co-operate with the NPPA in providing details, as required by them, to make the cost based system more transparent.
  • Serious apprehensions have been expressed about the quality of outsourced market data, which will form the basis of CP calculations.

Key challenges:

I reckon, there will be some key challenges in the implementation of DPCO 2013. These are as follows:

  • Accuracy of the outsourced market data based on which Ceiling Prices will be calculated by the NPPA.
  • In case of any gross mistakes, the disputes may get dragged into protracted litigation.
  • Outsourced data will provide details only of around 480 out of 652 NLEM formulations. How will the data for remaining products be obtained and with what level of accuracy?
  • The final verdict of the Supreme Court related to the Public Interest Litigation (PIL) on the NPPP 2012, based on which DPCO 2013 has been worked out, is yet to come. Any unfavorable decision of the Honorable Court on the subject may push the NPPP  2012 and DPCO 2013 back to square one.

Conclusion:

Thus, DPCO 2013 should achieve the objectives of the Government in ensuring essential medicines are available to those who need them most by managing prices in the retail market and balancing industry growth on a longer term perspective. Interestingly, it also encourages indigenous innovation and R&D.

Thus, DPCO 2013, at long last, seems to be a well balanced one.

That said, making drug prices affordable to majority of population in the country is one of most important variables to improve access to medicines. This is an universally accepted fact today, though not an end by itself.

It is worth noting, price control of medicines since the last four decades have certainly been able to make the drug prices in India one of the lowest in the world coupled with intense cut-throat market competition. Unfortunately, this solitary measure is not good enough to improve desirable access to modern medicines for the common man due to various other critical reasons, which we hardly discuss and deliberate upon with as much passion and gusto as price control.

Therefore, industry questions, why despite so many DPCOs and rigorous price control over the last four decades, 47% of hospitalization in rural area and 31% of the same in urban areas are still financed by private loans and selling of assets by individuals?

Others reply with equal zest by saying, the situation could have been even worse without price control of medicines.

By: Tapan J. Ray 

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.