Gilead's launch of Sovaldi is looking like the fastest drug launch ever. Hepatitis C afflicts an estimated 3 million Americans. The chart below, from ISI Group analyst Mark Schoenebaum, tracks the number of Sovaldi prescriptions written by doctors according to data tracker IMS Health (this is labeled as TRx) against the launch of Vertex's Incivek, another hepatitis C drug that was until now the fastest drug launch ever, and against the combination of Incivek and Merck's competing drug, Victrelis. Schoenebaum also draws in his own forecast of what Sovaldi would have to do to reach $5 billion in sales in its first year on the market. That's right -- I said $5 billion. And Sovaldi (the red line) is way, way ahead of that forecast. In fact, the prescription numbers seem to be going straight up. There are still reasons some investors might question Gilead's valuation. It may be that there are fewer hepatitis C patients than drug companies and public health officials think. It may be that Gilead gets blowback for the high cost of the drug -- $84,000 per course. It may be that other entrants, from AbbVie or Merck, for instance, will prove good enough or inexpensive enough to take market share or even force a price war. It's possible that insurance companies will push back.But having a product that is selling fast is a good problem to have.In fact, its Hep C sales for 2014 were $12 billion, which matched sales of its other products. And at a price = $1000 per day for84 days, Gilead Sciences was generating profit margins near 85 percent. And yes they got “blowback from Americans for Tax Fairness (ATF):
Prescription drug maker Gilead Sciences is raking in billions of dollars a year in windfall profits from public health programs and consumers for exorbitantly priced hepatitis C (HCV) medications developed with taxpayer dollars. It then shifts those profits to offshore tax havens, allowing it to dodge nearly $10 billion in U.S. taxes by the end of 2015. Taxpayers subsidized the development of Gilead’s HCV drugs, yet now pay sky high prices for them through Medicare, Medicaid, the Department of Veterans Affairs, private insurance and from their own pockets. The Food and Drug Administration assures Gilead’s products are safe, and the American patent and legal systems ensure that the corporation’s huge profits are protected. But despite all the benefits Gilead has received from taxpayers, Congress maintains a loophole-ridden tax system that has allowed the company to dodge taxes that pay for those benefits, leaving other taxpayers to pick up its tab. California-based Gilead is the sixth most valuable pharmaceutical company in the world, with a market value of $146 billion last year.1 Its enormous profits come primarily from two life-saving HCV drugs. Sovaldi went on the market in December 2013 at a cost of $1,000 per pill, or $84,000 for a full 12-week treatment. The actual manufacturing cost for a 12-week course of Sovaldi has been estimated at between $100 and $1,400. A combination treatment known as Harvoni, which pairs Sovaldi with another drug, debuted a year later at $1,125 per pill, or $94,500 for a full treatment. Competition and negotiations with purchasers have since forced the price of Gilead’s drugs down significantly from their original list prices, but the prices are still high enough to be considered profiteering and to cause hardship for consumers. And in June, 2016, the company announced that it would be pricing its newest HCV drug, Epclusa, at almost $75,000 per treatment, or about $900 per pill.I’m not about to defend this pricing of these treatments except to say the other biopharmas entered the Hep C market with their own products forcing down these initial high prices and lowering Gilead’s stock valuation. Before Solvaldi, Gilead’s market valuation was approximately $30 billion largely reflecting its successful HIV products introduced a generation ago. Yes the effect of the Hep C products did for a short while cause the stock price to rise to $117 per share (that $146 billion valuation), which only shows the risk Gilead Sciences took on buying Pharmasset paid off like a lottery ticket that hit the Megaball! The later competition from the other Hep C treatments, however, depressed Hep C sales and profits margins such that this stock price had fallen to around $60 per share. But this post is all about transfer pricing so back to the ATF report:
Gilead’s sales and profits have soared since its two life-enhancing HCV treatments came to market while its tax rate has plummeted. Gilead’s worldwide revenues recently tripled—from $11.2 billion in 2013 to $32.6 billion in 2015. (Sovaldi and Harvoni combined represented 56% of total revenue in 2014 and 2015, with nearly $32 billion in sales.) Corporate pretax profits soared even more: rising from $4.2 billion to $21.7 billion from 2013 to 2015, a five-fold increase. By 2015, Gilead’s after-tax profit margin was an astonishing 55%. Unfortunately for U.S. taxpayers, over the same period Gilead’s worldwide effective tax rate plummeted by 40%—dropping from 27.3% in 2013 to 16.4% in 2015.But of course sales and profit margins increased tremendously – the Hep C products were very successful in 2014 and 2015. OK – 16.4% effective tax rate is an interesting statistic. But why not examine Gilead’s 10-K filing? For example, its subsidiaries include Gilead Ireland Research UC which is the entity that paid Pharmasset $11 billion. As such, the Irish affiliate owns at least the phase II rights to the Hep C products under the arm’s length standard. The 10-K is also a treasure trove on financial information including sales and profits by product and by region. It turns out that 40 percent of Gilead’s income was sourced to the U.S. parent during 2014 and 2015. Of course, this contrast with the fact that 60 percent of Gilead’s income was sourced to the U.S. before 2014 when their HIV products were driving its financials. More on these products can be found here:
For more than a decade, Gilead Sciences has been a leader in the development of antiretroviral therapy for HIV/AIDS. Gilead researchers have developed 11 commercially available HIV medications and are advancing a robust pipeline of next-generation therapeutic options. Recognizing that the greatest need for HIV treatment is in the least-developed parts of the world, the company has put in place innovative programs and partnerships to expand global access to its medicines. Today, 12.6 million people are receiving Gilead HIV therapies in low- and middle-income countries.The phase II rights to these HIV products were developed in the U.S. while that Irish affiliate incurred the European phase III trials as well as the upfront marketing costs. For the HIV products, all profits generated on U.S. sales would be sourced to the U.S. parent while profits on sales in Europe would be split among the U.S. parent and the Irish affiliate, which likely explains why 60 percent of worldwide profits before 2014 were U.S. sourced. The Hep C business of course is quite different as the Irish affiliate owns the phase II rights. But interestingly most of Gilead’s Hep C sales are to U.S. patients, which begs the question how should these profits be sourced. It is difficult to answer that question, however, without knowing who paid for the U.S. phase III trials and upfront marketing. Which is to say I’m not necessarily that the ATF report is all nonsense as I trust Econospeak readers know I’ve never been a corporate homey. I’m just saying that appropriate allocation of worldwide profits under the arm’s length standard requires more information than this ATF report developed. And of course, this post is really just transfer pricing background for my follow-up post on Remdesivir. Stay tuned!