Remdesivir and Transfer Pricing III

Robert Waldmann posted his Remdesivir III:

I do not understand the need for “evidence-based medicine” or rather I do not understand how the phrase is used by doctors. There is no evidence that Covid 19 patients (without heart disease) do better without Chloroquine. I learn that “evidence based medicine” does not imply choosing the therapy that a fair balance of evidence suggests is best for the patient. Pharmaceuticals are presumed guilty until proven safe and effective. The evidence is treated as evidence in a criminal trial with the burden of proof on the pharmaceutical.

Back on March 2, he wrote:

I think that aside from the trials, Remdesivir should be given to patients and contacts of patients. It is known to be safe (from the trial which shows that it doesn’t cure Ebola). Also a whole lot of it should be produced starting a month ago.

Remdesivir is undergoing phase III trials in rapid fire fashion with some promising results. I have such hopes that I’ve been writing on the transfer pricing implications. But a little news on this production issue:

Mr O'Day said that Gilead has had to “effectively start from ground zero in ramping up our supplies” to meet demand for the agent. He said: “As soon as we knew that remdesivir may have potential in treating the novel coronavirus, our teams began to establish a supply chain for large-scale production.” One of these challenges of producing large quantities of the agent is the length of time it takes to produce remdesivir, he said, noting that the complex chemical reactions take “several weeks to complete.” After investing in ways to reduce the production timeline, Gilead has been able to cut the end-to-end manufacturing process in half, down to around six months. As well as repurposing some of its own facilities, the company has increased its network of external manufacturing partners to meet anticipated demand. Existing supplies of the therapy amount to 1.5 million individual doses, roughly 140,000 treatment courses, and the company has committed to providing the entirety of the existing supply for free. Mr O'Day said: “Providing our existing supplies at no charge is the right thing to do, to facilitate access to patients as quickly as possible and in recognition of the public emergency posed by this pandemic.” The firm has set a goal of producing more than 500,000 treatment courses by October and more than 1 million treatment courses by the end of the year, working with pharmaceutical and chemical manufacturers. I

f we need 10 doses per patient, having 1.5 million doses now and only another 1 million by year end translates into being able to treat 250 thousand patients this year. I agree with Robert that we need to push production as soon and as fast as possible. Gilead has produced some of its other life saving treatments using third party contract manufacturers in the past. The following passage is from their 2013 10-K filing, which was the last year before their Hep C product started dominated what was basically a company that designed and distributed HIV products:

We contract with third parties to manufacture certain products for clinical and commercial purposes, including Stribild, Complera/Eviplera, Atripla, Truvada, Viread, Hepsera, Emtriva, Tybost, Vitekta, Sovaldi, Ranexa, AmBisome, Cayston and Vistide. We generally use multiple third-party contract manufacturers to manufacture the active pharmaceutical ingredients in our products. We are the exclusive manufacturer of ambrisentan, the active pharmaceutical ingredient of Letairis, although another supplier is qualified to make the active pharmaceutical ingredient in Letairis. We also rely on third-party contract manufacturers to manufacture our tablet or capsule products. For example, we use multiple third-party contract manufacturers to tablet Stribild, Complera/Eviplera, Atripla, Truvada, Viread, Tybost, Vitekta, Sovaldi, Letairis, Hepsera and Ranexa. Emtriva encapsulation is also completed by third-party contract manufacturers.

Back then manufacturing costs represented 25 percent of revenues. We know in the next couple of years, the share of manufacturing costs for the Hep C products were a mere 5 percent of revenues in part because these new products commanded incredibly high prices. If Remdesivir turns out to be successful, the world will want a lot of it. How it will be priced and exactly where it will be produced is still open to question but Robert and I want to see a lot of production going on even if that production is turned over to Gilead’s “external manufacturing partners”. Now a brief comment on intercompany pricing. Let’s suppose that a lot of these products are produced in places like China and India (and let’s hope we do not get a stupid Trump trade war). If the manufacturing facilities are related party manufacturers, you can count on the local income tax authorities wanting as much profit in their local jurisdiction as possible. A fair question would be to inquire what is the arm’s length price? A natural answer would be to look at what is being paid to the third party manufacturers. The alternative would be some sort of cost plus approach. But what markup should one pick? I have seen credible analyzes that put the markup as low as 10 percent but there are other situations where a biopharma contract manufacturer receives cost plus 25 percent. Such a transfer pricing controversy might be an interesting exercise in the future but for now let’s hope this treatment works and if so – let’s get busy manufacturing it!