What is the difference between mark-up and margin?

Venture Capital in Healthcare and Biotech: What would an investor consider a healthy margin/markup in pharmaceuticals along the supply chain, but most importantly what I would sell for?

• If you say 5X markup/80% margins (as an example), you could mean that you sell it to the distributor for 5X markup, or you could mean that it ends up getting marked up 5X by the time it gets to retail with multiple markups along the way, but you probably only get 2X or 3X directly.  It would be interesting to know the markup at all points of the supply chain, but obviously the most important is how much my company is making directly.  For a company to attract investment, what would you expect those margins to be at?

• Answer:

  I don't totally understand the question, but here's my understanding. For branded, patented pharmaceuticals, the manufacturer's cost of goods is usually nominal, and they sell the drug for as much as they can get. Pfizer, for example, had a 78% gross margin last quarter on $17 billion in sales. Nobody else in the supply chain is making much in the way of margins: The markup between the manufacturer (e.g. Pfizer) and wholesaler (e.g. McKesson, Cardinal or AmerisourceBergen) is less than 10%. McKesson, for example, had a 5% gross margin last quarter on $27.5 billion in sales. The markup between the wholesaler and what the pharmacy is reimbursed by the pharmacy benefit manager or insurance carrier is less than 20%, plus a "dispensing fee." Medicare, for example, pays pharmacies the "average sale price" plus 6%. The "markup," or risk premium, between the PBM's cost and what they make in insurance premiums paid by you, your coworkers and your employer is probably less than 20%. In the last quarter of 2006, before it was swallowed up by CVS, Caremark had a gross margin of 7% on $9 billion in revenue. Nobody is getting 80% margins along the supply chain for branded pharmaceuticals except the manufacturer! The story with generic medicines is a bit different -- crazy markups, but at least they still cost less than their branded equivalents. Investors in drug startups care about whether your treatment would meet a high unmet need, your chances of a successful clinical trial program, the price you would be able to charge if successful, and your ability to persuade the right physicians to prescribe your treatment. I don't think supply chain markup is really a big factor. Anyway, if you are a drug startup you're probably going to beg to give 60% of your drug's future revenue stream to big pharma in exchange for production-scale manufacturing, distribution, a sales force and clinical-trial funding anyway!