A markup of 279,000% over production costs

[whatthehey]

10. gouging of course, but percentages are deceptive

This is a not rare but not usual case in pharma where we can easily cut through the claims of R&D spending. Here that was subsumed completely into an $11B buy in.

So the company is $11B in the hole before they sell pill 1.

It goes for $84,000 per treatment and costs pretty much $25 to make if that % is true.

That makes breakeven assuming zero SGA (impossible) at 130,991 treatments. They only start to contribute to overhead at the 130,992nd full price treatment.

Now we can't cut through SGA obfuscation so we can maybe take an average. The company's overall gross margin is 75% and net margin is 28% so this means they have 47% overhead/revenue.

So far so bad for Gilead. But there is good (for them) to come. 3.2million people in the US deal with Hep C. Uptake of treatment data is hard to find in the US but in Canada is about 24-25%. That's probably higher than the US as their coverage is better but let's use it. That means about 800,000 people will seek treatment in the US.

Obviously I have no clue based on comparable efficacy what their proposed share is, as I'm neither an MD or a pharma marketing guy, but let's pick 50% penetration and they would have a $33.6B business (400,000 treatments). Manufacturing would cost them just $10MM but SGA would cost that 47% or $15.8B. They would make then $17.8B but need to pay back $11B in investment for net profit of $6.8B - about 20% return if they get 50% of the market.

Of course if they can lower SGA ratio (probably can as a new drug doesn't add an entire new set of overhead. There's more salespeople and marketing and Finance brand folks and whatnot but still only one CEO, one HQ office etc) and keep the prices going after competition comes in (probably can't for long) then year over year it will get better, but still, while it's great cake and nice profit, it's not 279000%. It's important not to assume price-direct costs is profit, especially in the massively overherhead-laden pharma industry and with an 11 figure upfront ante to pay off.

And while executive salaries are certainly obscene and undeserved, we need perspective there too. Even if we assume every penny of the above is checks written by Gilead (not true of course - stock options are only a fraction of value received) the total would be about 1.2% of Gilead's revenue and 5% of its overhead costs.