INSIGHT

Mastering Gross-to-Net (GTN) challenges in life science: A pathway to success

Kendall Kuhn, Sarah Weaver, Michael VanderKlugt • April 10, 2025

Industries: Life Science

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Life science companies face increasingly complex challenges when managing their gross-to-net (GTN) calculations and revenue tracking. From emerging biotechnology firms to established pharmaceutical companies, the intricate web of pricing strategies, government regulations, distribution agreements and contractual obligations demands a sophisticated approach to financial management.  

This article explores the critical gross-to-net challenges facing life science companies today, and how partnering with an experienced accounting and advisory firm can help you navigate these obstacles while ensuring compliance, transparency, and financial accuracy. 

Understanding the core challenges 

The heart of the challenge lies in the multifaceted nature of pricing and revenue recognition for life science businesses. Companies must navigate complex rebate structures, government pricing requirements, varying forms of distribution and supply agreements and various contractual obligations while maintaining accurate financial forecasts. The stakes are particularly high for organizations preparing to launch new products or expanding their commercial presence. The margin for error continues to shrink as regulatory requirements become more stringent and market dynamics grow more complex. 

For emerging life sciences companies, the challenge often begins with limited internal resources. Many organizations maintain lean operations to focus on research and development, leaving gaps in their financial management capabilities. Additionally, there can frequently be significant timing differences between GAAP and tax GTN accounting, which coupled with the 2022 legislation requiring R&D capitalization for tax purposes, can lead to unexpected tax liabilities.  

This resource constraint can lead to significant challenges in managing gross-to-net calculations effectively. The situation becomes even more demanding as companies transition from development to commercialization phases, requiring robust financial management systems and processes. 

Key challenges include: 

• Managing multiple contract types and terms with various stakeholders, including distributors, pharmacy benefit managers, and government programs. These relationships require careful monitoring and precise calculation of rebates, chargebacks and other pricing adjustments. The complexity increases with each new market entry and additional distribution channel. 
• Maintaining accurate data collection and integration across multiple systems and sources. Companies must ensure their GTN calculations reflect real-time information from various channels while maintaining data integrity throughout the process. This challenge grows exponentially as organizations expand their product portfolios and market presence. 

“Estimating gross-to-net accruals can be extremely challenging and time-consuming due to the multiple types of rebates, discounts, and allowances—each with terms and timing that can vary significantly based on the distribution channel and government program. These estimates must be made and recorded at the time of initial revenue recognition (i.e., when a product is shipped or delivered to the customer, typically a distributor or pharmacy).  While some GTN rebates, discounts, and allowances are earned upon shipment or delivery to the immediate customer, others may not be billed for weeks or months. This delay occurs because inputs typically depend on the end recipient of the drug, as well as factors such as government programs, patient insurance policies, and third-party claim processors, which ultimately bill the company.” – Kendall Kuhn – Partner, Assurance 

• Implementing effective forecasting methodologies presents another significant hurdle. Life sciences companies need reliable predictions of their net revenue to make informed business decisions, yet the complexity of pricing arrangements and market dynamics can make accurate forecasting seem like an insurmountable task. The introduction of new payment models and value-based contracts further complicates these forecasting efforts. 
• Navigating the regulatory landscape adds another layer of complexity to GTN management. Life sciences companies must comply with various state and federal regulations while accurately reporting their financial position Even minor discrepancies in pricing calculations can trigger a cascade of issues, affecting everything from cash forecasts to compliance requirements. The increasing scrutiny of drug pricing and transparency requirements adds additional pressure to maintain precise calculations and clear documentation. 

How do these challenges impact life science companies? 

While the need for financial reporting under U.S. GAAP standards can often be nuanced, the impact of these challenges extends beyond financial reporting. Inaccurate gross-to-net calculations can affect: 

• Strategic decision-making around product launches and market expansion efforts, potentially leading to missed opportunities or misallocation of resources. Companies need precise financial data to evaluate market opportunities and make informed investments in their product pipeline. 
• Compliance with government pricing programs and regulatory requirements, which could result in significant penalties and reputational damage if not managed properly. The consequences of non-compliance continue to grow more severe, making accurate calculations increasingly critical. 
• Working capital management and cash flow forecasting, affecting the company’s ability to fund ongoing operations, potential tax bills and future growth initiatives. This becomes particularly crucial for companies managing multiple products across various stages of development and commercialization. 
• Providing accurate forecasting of top-line growth in revenues and margins is key to investor relations and fundraising activities, and can be impactful to share pricing. 
• Companies must evaluate the accuracy of market reports, as well as customer and distributor data, used to record revenues and chargebacks or if adjustments to such data is required. 

For example, there can be timing differences between the wholesale acquisition costs (“WAC”) charged at the time of the initial ex-factory sale to distributors and the WAC in effect at the time product is sold by distributors to pharmacy or dispensed by the pharmacy to end patients. As certain rebates may be calculated at the rate in effect upon the ultimate sale to end customers or patients, which can result in higher GTN ratios relative to historical trends. 

Building a Sustainable Foundation 

Companies seeking to overcome these challenges need a comprehensive approach that addresses both immediate operational needs and long-term strategic objectives. This approach should encompass advanced analytics capabilities, robust data management systems, deep industry knowledge and professional audit oversight. Success requires not only technological solutions but also a thorough understanding of industry dynamics and regulatory requirements. Organizations must also consider the scalability of their solutions as they grow and enter new markets. 

The implementation of effective GTN management systems requires careful consideration of various factors, including data integration capabilities, reporting requirements, and compliance needs. Companies must also ensure their chosen solutions can adapt to changing market conditions and evolving regulatory requirements while maintaining accuracy and efficiency in their calculations. 

Working with BPM   

BPM has extensive experience advising and auditing companies with GTN complexities and understands the unique challenges they face.  We combine decades of life sciences industry experience with cutting-edge technology to help companies navigate GTN challenges and tax planning.  By partnering with BPM, organizations gain access to comprehensive solutions, from implementing robust calculation methodologies to developing accurate forecasting models—driving strategic growth and long-term success in today’s competitive market.  To find out more, contact us.