	
	While companies are beginning to plan for the coming year and beyond, there is no time like the present for pharmaceutical executives to evaluate whether they’re taking full advantage of the research and development (R&D) tax credit. Recently, President Obama signed into law a bill that retroactively extends the R&D tax credit for expenses paid or incurred in 2014. Even with the potential of substantial benefits, many companies aren’t claiming these credits because of common misconceptions.

	Let’s take a few moments to dispel the most common of these misconceptions.

	Calculating the research tax credit just isn’t worth the time it takes

	In 2011, the last year for which the IRS published data, U.S. corporations claimed $9.24 billion in R&D tax credits. Executives will find value in these dollar-for-dollar offsets against tax liability because the credits can help companies increase their cash flow and earnings per share, reduce their effective tax rate, hire more staff, develop new products, and finance other business objectives. Just how sizable can these benefits be? Federal and state research tax credits can equal 15% or more of a company’s qualified spending, and can result in substantial benefits for companies of any size. The credit can result in cash back for previous open tax years and can also represent future savings, as they can be carried forward up to 20 years.

	We aren’t performing activities that are eligible for the credit

	Traditional research activities that take place during the development of groundbreaking drugs aren’t the only activities that qualify for the R&D tax credit. Pharmaceutical companies may think they’re not performing as many qualified activities as they are because many of the costs that qualify for the credit are accounted for as “R&D expenses.” So, as long as companies are attempting to develop new and improved products, product lines, manufacturing processes, or software, they could be eligible.

	As discussed in a roundtable recently on process innovation published in 

, companies are working towards improvements in their production processes-activities that may be eligible for R&D tax credits. Supplies used in these processes might also qualify, including lab supplies, prototypes, and experimental production lots. In addition, some supporting functions like marketing and product safety, may be performing qualified activities that should not be overlooked.

	We haven’t claimed any credits before, so we’ve lost the chance

	Up until recently, taxpayers who didn’t elect the Alternative Simplified R&D Credit (ASC) on an original return could claim only the Regular R&D Credit on an amended return. This may have acted as a deterrent to taxpayers to report the credit, because the Regular Credit can sometimes require financial documentation from tax years dating back to 1984. Moreover, because the Regular Credit and ASC are calculated differently, the Regular Credit is sometimes zero while the ASC may be quite significant. Now, with the ability to claim the ASC on an amended return, the process of both calculating and supporting qualifying activities is simpler. Because of the ASC and this new rule, executives should reconsider whether their companies can claim research tax credits in both current and prior years.

	R&D tax credits are often challenged by the IRS and difficult to defend

	Although it’s true that the IRS may challenge research tax credits if a taxpayer is audited, companies have a track record of successfully defending these challenges. The IRS has published the Pharmaceutical Industry Research Credit Audit Guidelines to provide guidance for IRS agents and managers examining pharmaceutical research tax credits.  These guidelines provide helpful information to industry taxpayers, as they identify audit areas that have the lowest and highest probability for errors.  Executives may consider leveraging this document to prepare for potential audits.

	Taxpayers also benefit from a directive released by the IRS in late 2012 that instructs examiners to provide more flexibility in allowing the R&D tax credit for companies developing pharmaceutical drugs. This directive allows taxpayers to qualify their expenses incurred in the discovery and preclinical and clinical stages of development with less federal push back. IRS agents are instructed not to challenge these expenses if the taxpayer certifies that they were (1) incurred in the discovery, preclinical, or clinical stages of development; (2) for “qualified research;” and (3) not for activities excluded by statute.

	Additionally, a recently decided US Tax Court case, S

, provided several taxpayer-friendly points that can assist companies in defending their claims: 

		Activities that tax examiners often disallow as “routing engineering” or “routing software development” were upheld.

		75% of the CEO’s time, and a high percentage of other senior management’s time, was allowed as qualified research activities, including time that was spent in strategy meetings coming up with new ideas, in follow-up meetings throughout the product development process, and reviewing and signing off on specifications, among other activities.

		Substantial time for employee activities tax examiners sometimes question was also allowed, including quality assurance and field testing.

		Expenses paid to law firms for patent research and prosecution were also permitted.

		Considerable weight was given to employees’ testimony and representations in finding that qualified activities were performed.

	Research tax credits aren’t substantial enough to invest in developing drugs for uncommon diseases

	The government supports further drug development, as Congress has passed the orphan drug credit to incentivize companies to search for the treatment of rare diseases. Regrettably, many pharmaceutical companies aren’t claiming this valuable credit, which is equal to 50% of qualified clinical testing expenses paid or incurred in developing the drug. Qualifying costs occur between the date the FDA designates a drug as an “orphan drug” and the FDA’s drug approval date. Taxpayers must remember, however, that some expenses may qualify for both the R&D tax credit and the orphan drug credit, but they cannot claim both credits for the same expense. 

	While these and other misconceptions regarding the R&D tax credit may cause some pharmaceutical companies’ tax strategies to underperform, others may take a moment to review and determine whether R&D credits can be leveraged for a positive bottom-line impact. With more capital on hand, such companies will be better poised to innovate, influence, and deliver, which could result in market-leader prominence. 

Chai Hoang is R&D Tax Services Senior Associate at BDO USA, LLP. She can be reached at 

. Chris Bard is National Leader of R&D Tax Credit Services at BDO USA, LLP. He can be reached at 

Articles

Columns

Why executives should make the US R&D tax credit part of their planning discussions, by Chai Hoang and Chris Bard.

Refuting R&D Tax Credit Myths

Modern medicine is founded more on facts than faith. But for hepatitis C virus (HCV) patient Gavin West, the single pill drug 

 is not just a virus-wiping cure-it’s a miracle. Ironically, it was April 3-Good Friday to millions of Christians-that the 59-year-old singer and retired avionics specialist walked out on a Nashville stage with his musical partner, well-known local songwriter Rob K. Wolf, to celebrate a physical and spiritual restoration of his own. Instead of queuing for a liver transplant, West that Friday resumed his sets with Wolf-live, to a receptive audience of hundreds, who remembered him well. Says West, “

gave me my voice back along with hands that could again feel the strings on the guitar that had sat under my bed, unused, for more than 10 years.”

	Whether you classify West’s case as a clinical outcome or just an arresting anecdote, the facts on 

 and its companion, first-to-launch predecessor, 

, don’t strike the flat encore notes often associated with a breakthrough drug. For the 170,000 HCV patients prescribed the two drugs since the initial US launch of 

 in December 2013, Gilead’s one-two punch hits home. A trial-certified efficacy rate of well over 90% made 

 the first well-tolerated cure for a disease most patients didn’t even know they had until it damaged the liver, one of the body’s most essential, complex-and costly to replace-organs. With its shortened duration to cure, and an even higher efficacy rate, 

	Gilead’s executive VP for clinical research, Dr. John McHutchison, summarized it this way in a recent interview with 

. “When Sovaldi was approved, it was the first all-oral regimen for genotypes 2 and 3 of the virus, which covers more than a third of the infected population here in the US. In patients with genotype 1, it allowed for a much shorter treatment time in combination with  interferon, which cut the severe side-effects associated with previous use of that older medicine. Response rates to 

 were all higher than had ever been seen before, in excess of 90%, while therapy discontinuation fell to under 2%-an astounding number, given that the basic characteristic of prior drug treatments was to leave both patient and clinician discouraged by the reality that those side-effects could actually make you feel worse than the disease itself.”   

s Editorial Advisory Board (EAB) seem to agree, tapping 

together as our 9th Brand of the Year, in a unanimous vote. That itself is a precedent for this normally contentious group. Our EAB cited Gilead Science’s unwavering commitment to a strong franchise in anti-viral therapies through clinically useful drug combinations whose tolerability appeals to patients. Perhaps more important is the psychological boost provided by the $10.3 billion in US sales posted by 

 in 2014, a first-year launch record unmatched by any previous brand name drug. Combined with some $2 billion in post-FDA approval revenues from 

, this HCV breakthrough duo fell just short of matching the $12.5 billion in 2014 sales of the top-selling US branded drug, 

	It’s also rare to see any branded medicine with such a transformative effect on a company’s fortunes and mission. With 

eading the way, Gilead’s full-year revenues for 2014 leapt to $24.9 billion, up 127% from the $11.3 billion it posted in 2013. This year, the company will enter the top 10 of our annual Pharma 50 revenues ranking, nosing out century-old R&D icon Eli Lilly & Co. as well as AbbVie and AstraZeneca. Just five years ago, Gilead sat at No. 23 on the list. 

	And while Gilead remains tightly focused on the anti-viral business, HCV has-at least for the moment-eclipsed the company’s traditional weight in the HIV space. In 2013, prior to 

, 76% of Gilead’s net revenue growth was attributable to HIV, where the company markets the top three US selling drugs for AIDS; hepatitis (specifically, the B strain) was a distant also ran, at 10%. Today, the situation is on its way to being reversed, with HCV accounting for 48% of total revenue in 2014, compared to 44% for HIV.   

	The company sees this as a simple confirmation of its business model. From a purely clinical perspective, the two segments are almost complementary. Research insights and marketing precedents from Gilead’s two decades of trench warfare against HIV-Gilead launched its first antiretroviral, 

, back in 2001 (a joint indication for HBV was added in 2008)-has helped it secure leadership in the far bigger market for HCV. With 160 million people infected worldwide, the numbers on HCV incidence are more than four times higher than for HIV. “We believe there is substantial room for growth at both ends of an anti-viral business with major unmet medical need,” Gilead President and COO John Milligan told analysts at January’s JP Morgan investor conference.

 story dispels the prevalent view that medical progress always occurs at a glacial pace, measured in multiples of decades rather than years. Instead, the race for a cure for HCV proceeded in a series of predictable relays, borne by the momentum of great science. Once the properties of the virus were identified in 1989 by a team led by the San Francisco-based vaccine company Chiron, researchers focused on creating reliable high-throughput screening systems for use in both the lab setting and for viral detection in the population. That goal was accomplished only a few years later, in 1992. Data and insights derived from these investigations and experience with combination HIV treatments drove awareness that HCV could best be managed through a multiple drug approach, testing combinations of enzyme inhibitors and other molecules along a variety of pathways to suppress the virus’ capacity to replicate and develop resistance.

	“Progress in drug development for HCV has occurred at a much faster pace than in areas like HIV. We’ve moved from a few isolated treatments to a pan-genotype cure in the space of about 10 years, which is remarkable given that there was really no development science behind this disease until after 1989,” says McHutchison.   

	The pace of innovation has been all the more remarkable given the unique epidemiology of HCV. In contrast to HIV, the disease has never attracted attention at a level commensurate to its reach; pundits call it the “stealth epidemic.” Before its distinct structure was revealed, the virus was confused with the other, more easily detectable forms of hepatitis, A and B. Spread of the virus was endemic through the donor blood supply until patient screening was widely introduced in the early 1990s, but cases of infection continue through unsafe surgical practices in developing countries as well as unsterilized needle exchanges and injection drug use, tattooing, and other types of unprotected behavior. This latter reflects another aspect of the disease: its largely unfounded association with stigmatized populations like prisoners and drug addicts. The breadth of potential exposures over time has resulted in reduced rates of diagnosis and a historical under-reporting of the actual number of HCV cases. 

	HCV is endlessly inventive in forming new versions of itself, which makes the task of mapping appropriate drug targets very difficult. Composed of a single strand of RNA, the virus has at least six genetically distinct variations. Once in the blood stream, the virus does its work silently. Generalized, non-attributable symptoms like fatigue, body aches, weight loss, and depression persist over many years. Early detection is essential because, in the majority of cases, the virus progressively attacks the liver, often leading to cirrhosis and liver cancer. Treatment for the end-stage of liver disease may require full or partial organ transplant to ensure survival. Besides being a difficult and costly procedure, liver transplants carry a 100 % HCV recurrence rate without effective treatments.  

	The bottom line is that HCV remains a serious illness with a lasting residual effect on public health. Its impact spans gender, race, age, and economic class. Some 3.2 million Americans are estimated to be infected with the virus; approximately one half, or 1.6 million people, have been diagnosed.   

	More importantly, the annual US death toll from HCV has surpassed deaths from HIV since 2007, when 15,000 people succumbed to conditions caused by HCV, compared to slightly less than 13,000 from HIV. A February 2012 study published in the Annals of Internal Medicine predicted that annual HCV deaths in the US would more than double by 2030, to 35,000, due to the aging of infected baby boomers born before the introduction of blood donor screening requirements. This estimate did not anticipate an effective cure over this period, but it, nevertheless, serves to indicate how broad the potential benefits of Sovaldi are from a public health perspective. Globally, the potential payoff is even bigger. World Health Organization (WHO) statistics attribute 500,000 deaths a year to HCV.

	Tepid treatments-and half-hearted cures 

	The interferon class of powerful anti-infective drugs developed in the late 1980s was the first treatment approved for HCV, but its efficacy was low, with severe side-effects for most patients. In 2001, the FDA approved a longer lasting, pegylated interferon for use against HCV. Shortly after, researchers discovered that a combination of pegylated interferon together with an anti-viral drug, ribavirin, proved more effective in suppressing the virus than interferon alone. This quickly became the drug option of choice for the next decade. In 2011, researchers were able to apply learnings from the protease inhibitor class of medicines originally developed for HIV to the HCV space, resulting in the launch by Vertex later that year of Incivek, with a relatively higher rate of efficacy in patients with the genotype 1 strain of the disease-but only when combined with the interferon/ribavirin cocktail. 

	For most HCV patients, drug treatments for their condition proved frustratingly inadequate. All three of the drugs used in combination had potent side-effects, ranging from general malaise and flu to anemia, chronic nausea, cognitive impairment (“brain fog”), serious rash and/or anxiety, and depression. The regimen, which lasted as long as a year per treatment cycle, required weekly painful injections and frequent blood tests. More importantly, cure rates for the average patient hovered around 35% to 65%, depending on individual genotype, and relapse was not uncommon. The side-effects were such that half of all patients had to reduce the dosage of the combination drugs or even discontinue treatment prior to the end of the standard 24-to-48-week treatment cycle. This made the combination regimens even less effective on retreatment.    

	The larger implication was to perpetuate HCV’s status as a low opportunity target, which meant that the flow of money and scientific talent were diverted to more promising areas of research. Patients also suffered due to the natural tendency of clinicians to avoid prescribing medicines seen as causing more harm than good. An active clinical response was often dispensed in favor of “watchful waiting,” effectively placing patients in limbo-a slow slide toward disability and worse.

	For Gilead, this downward spiral of expectations coincided with its own outsized ambitions to raise the bar on unmet medical need. A company whose credo to employees begins with the confident assertion that “being here matters” is not interested in a business model centered on the pursuit of incremental improvements. “Here was a  condition affecting 160 million people worldwide where it could fairly be said that the majority of patients felt worse on therapy than without it,”  Joe Steele, Gilead’s vice president of commercial operations, told 

. “Given our stake in anti-virals, we saw it as a direct challenge that a community this large wasn’t being served by the existing drug delivery paradigm.”  

	In HIV, Gilead had eclipsed bigger, more experienced pharma rivals by focusing on patient concerns around efficacy, tolerability, and convenience.  In doing so, it revolutionized patient care-and outflanked the AIDS virus -through a novel series of fixed-dose combination products. Gilead believed it could pursue an analogous approach for drug delivery, but this time with the goal to achieve what patients needed most: a quick and certain cure. “From both a scientific and commercial standpoint, a cure that was simple, safe, and free of interferon was the only approach that made sense to us,” says McHutchison.  “In terms of a clinical approach, the relevant analogy was HIV. We knew we would need multiple drugs, working through multiple mechanisms of action, to prevent viral resistance. We also knew that the most effective therapy for patients is the simplest: a single tablet, administered orally for a short, fixed duration of time. And this oral regimen would have to work across all the different HCV genotypes, ultimately for routine use around the world.”

	It was a tall order. Gilead has been active in research on hepatitis B since its founding in 1987. But it was the June 2010 recruitment of McHutchison, a top-ranked researcher and clinician from Duke University, to run the company’s liver disease therapeutics program that increased the fixation on an HCV cure. McHutchison formed a multi-functional development team committed to developing a breakthrough product with four characteristics, which he called the “s set:” Safe; Simple; Short; and, of course, efficaciouS. The group mapped a 10-year course toward that ultimate regimen, to be achieved in a series of waves, starting with reduced reliance on interferon and ribavirin and their harsh side-effects; continuing with elimination of interferon from the HCV drug basket entirely; launching a new drug to be taken once a day, selectively targeting different genotypes; and ending with a single oral pill of universal efficacy, providing a cure across all six genotype strains of the virus.

	Five years into the program, two new HCV products have been commercialized, and the company is making progress in breaching that last hurdle, on pan-genotypic efficacy. December 2013 marked the FDA authorization and launch of Sovaldi (sofosbuvir), a nucleotide analog formulation that in clinical trials prevented HCV from replicating, with a sustained virologic response or cure rate of more than 90%. Unlike candidates in other classes, sofosbuvir exhibited much higher potency against viral resistance while cutting the required duration of interferon by more than half. This in turn reduced the severity and duration of side-effects, which had for years been a serious barrier to treatment. These advantages were enhanced by oral administration of the drug in a treatment regimen of as little as 12 weeks, compared to the six to 12 month duration of conventional therapies relying heavily on injected interferon.

 was intended as only the first “wave” in Gilead’s race to a cure. The medicine still has to be taken in combination with another anti-viral drug, ribavirin; in some cases, interferon is recommended as well.  

	Within nine months, however, Gilead had a second new product, 

, which plugged most of the gaps in Sovaldi’s pharmacological profile. Approved by the FDA in October 2014, 

(sofosbuvir) and ledipasvir, a second nonstructural protein 5A (NS5A) inhibitor that came from Gilead’s labs. What is significant about 

is that efficacy is accomplished without reliance on both earlier treatments, interferon and ribavarin. It avoids the severe side-effects associated with these two drugs, which often led to poor patient compliance.

 efficacy in about 95% of patients, all on the basis of a single daily pill taken for as little as eight weeks-record timing in the HCV space. More importantly, its FDA-approved label covers genotype 1 patients, the most common in the US.

	Gilead is now moving to top the two “waves” in the HCV plan it devised back in 2010. A global multi-site Phase III trial involving more than 1,000 patients is underway to extend clinical progress from 

 to create a single, safe but more potent oral pill that will work in all HCV patients, regardless of genotype. Results of that study will be available at the end of the third quarter of this year. Finally, the company is testing in parallel these fixed-dose combinations to tackle co-infections with HIV as well as populations of patients with HCV that are most in need.

	McHutchison attributes the rapid scale up to the Gilead culture. “There are two ways to approach drug development. The first is to do the bare minimum to get the drug approved. The second is reaching beyond the regulatory process to understand the people most in need of the drug, to the full extent of how they might benefit. We chose the latter course.” McHutchison tells 

 that some of the biggest challenges were not only clinical but ensuring there was a supply chain at the ready to meet the pent-up demand for a cure. Adds Joe Steele, Gilead’s VP of commercial operations, “we faced some tough, time-sensitive issues linked to manufacturing-formulations, batch production and tonnage, volume estimates, quality control, transport-you name it.” 

	Culture or not, some observers will wonder just how much sweat equity Gilead actually put in to solving the HCV puzzle. Its 2011 acquisition of rival HCV start-up Pharmasset spawned a discussion best summarized at the time by analysts’ consensus that Gilead had paid too much-$11 billion-to buy a drug invented by someone else. And how hard is that?

	McHutchison begs to differ. “When we acquired Pharmasset, relatively little had been done to evaluate the full potential of this drug in the field. The clinical and commercial potential was unclear. We knew that Pharmasset’s investigatory candidate, PSI-7977, which eventually became 

, had demonstrated efficacy for several genotypes, but there was no efficacy data at all for genotype one, which in the US accounts for almost three-quarters of HCV patients. So right after the acquisition, we initiated two Phase III trials targeted at different sub-groups within genotype 2 and 3; a larger Phase III study centered on genotype 1; and a series of exploratory studies on difficult-to-treat patients including those with HIV, efficacy and safety of treatments before and after liver transplants, and other groups including the infected from marginalized populations.”

	Initial readouts from some of this trial work were not all salutary-in one case, McHutchison relates, poor numbers on efficacy caused Gilead’s stock price to drop 10% overnight. Another ripple was the decision, just three weeks after the acquisition was announced, to shut down work on another nucleotide analog candidate in the Pharmasset pipeline after trial data revealed the drug was hepatotoxic. “It shows there was a degree of risk involved in that $11 billion.” Insists Steele, “all the agents we are now combining with 

 to form the next generation of HCV drugs, including ledipasvir, the lead compound in Harvoni, come from discovery and development programs we initiated long before Pharmasset.” The deal complimented Gilead’s existing strengths; “in that sense it was a good fit.”

	Beyond that, support from the clinician community proved instrumental in turning all that cumulative research into a highly effective, marketable cure. “Once we had Pharmasset, the pressure was on,” said McHutchison. “We had to move quickly to set up trial sites and recruit.” McHutchison leveraged his Duke ties, but he notes it was the “incredible efficiency” of Gilead’s in-house clinical development team that proved instrumental. Another factor was support from the FDA in collaboratively broadening recruitment criteria, particularly as interferon, with its many contraindications, was now sidelined from its previous role as a companion drug and comparator. “Based on the new interferon-free therapy, we were able to recruit a new cohort of marginalized patients with comorbidities. In one trial, we were able to enroll 600 patients in six weeks-no one had recruited at that pace before.” 

	It followed, too, that greater diversity in the enrollee pool reinforced the trials’ statistical conclusion that a broadly applicable cure was at hand. And it no doubt helps that results of six Phase III trials conducted by Gilead, post-acquisition, now bolster indications found on the labels for both 

	With such strong scientific credentials behind it, is it true to conclude that the commercial launch of 

was an anticlimactic event-that rare case of a product so good it could sell itself? Conversations with the Gilead HCV commercial team suggest this premise carries some weight, but ultimately fails to account for those pesky “human elements” that can intervene to either bolster that good case-or suppress it. “There was really no challenge for us to align customers around this product,” says David Johnson, VP for US sales and marketing in Gilead’s liver disease business unit. “The science was strong and the data we compiled was very convincing.” Johnson notes that the HCV clinical community is small and very tight knit; because practitioners were enthusiastic backers of the trial work undertaken by Gilead, they required little convincing about 

’s merits in giving them-and their patients-a real chance for a cure. 

	The primary driver in the launch was educating physicians on the proper course of treatment for each patient-a complex task. Says Johnson, “With six Phase III trials embedded in the label, we needed to ensure prescribers understood the data on which the FDA based its approval. There are six genotypes of the disease, and different regimens and duration are indicated for some of them.” This is where the quality of Gilead’s trial work played out: because McHutchison and his team insisted on including a full range of test subjects, especially sequences of subjects with lower and lower blood platelet counts, the results provided a highly accurate indication of how 

) would work under real-world conditions. The positive readout was recycled back to patients, too, through an unbranded disease awareness campaign urging them to seek help because, for the first time, a cure offered the hope of being able to resume a normal life. 

	Johnson and Steele also point to culture and institutional factors in prepping 

 for its debut. Both note that Gilead is a flat organization, with minimal bureaucracy and only a few layers of management. A simple statistic helps back that up: even though Gilead’s annual revenue base is now bigger than  Lilly’s, it has a fraction of the employee count: 7,000 worldwide, compared to Lilly’s 38,000. Steele offers, “it’s not rocket science. There is very little distance here between the people needing decisions made and the people making those decisions.”  

	Adds Johnson, “we value proximity. The lead marketers for the US organization in every therapeutic area we serve are on one floor in one building. If I have a question for my colleagues in HIV, I just walk down the hall.” One committee-the HCV Commercial Planning Group, chaired by Steele-managed all the strategic issues around the launch, including country-level guidance on product profiling, brand messaging, and locally targeted market research.

	In addition, early-stage collaboration with McHutchison’s clinical development group ensured all clinical study designs included relevant information to support a positive reimbursement decision by local country authorities. “There was a strong quality of life element in our protocols, buttressed by independent health economics and outcomes research from local academics. More than a dozen peer review papers have been published to date that demonstrate how 

is a cost-effective solution to managing HCV,” McHutchison said. “In fact, says Johnson, “the clinical team moved so fast in getting 

to market that we on the commercial side had to constantly revise our own timelines. But that’s what you get when the product-not the process-sets the pace.”      

	Indeed, the breadth of the data helped Gilead obtain timely-and largely uncontroversial-coverage and reimbursement decisions from single-payer authorities in all the major European markets, including France, Germany, Spain, Italy, and at the UK National Institute for Health and Care Excellence (NICE), where the hard-to-meet quality-adjusted life-year standard is king. 

met that test, subject to a six-month deferred access proviso to accommodate a NHS budget glitch. 

 rollouts set records-on that score, Gilead’s success was undeniable. The one big miss is the reputational hit that Gilead took from US Medicaid and leading private-sector pharmacy benefit mangers (PBMs) for its decisions on pricing the two drugs, in which it was alleged the company failed to reach out in a timely manner to help them prepare for the financial impact. According to Gilead, pricing followed standard industry practice, benchmarked around what was already on the market-with a statistically defensible increment based on evidence of 

’s higher cure rate. The bigger challenge was accurately assessing demand for the product, a calculation where few payers appeared to have done their homework.  

	 Gilead itself was caught short. “Right out of the gate, we found an unexpectedly large number of patients whose physicians had postponed drug therapy in anticipation of a new cure.” It turned out that 

was not just another rare disease product. “Facing up to that proved tough going,” Johnson told Pharm Exec. “State Medicaid agencies, in particular, had a difficult time predicting the demand and also had to work within fixed budgets.” And HCV had such a low public profile that many assumed it was a rare disease-could it be said the epidemiologists were asleep at the switch?

	Despite the kerfuffle over pricing, all the key stakeholders in HCV-industry, payers, providers, and, of course, patients-have still committed to find a way to access these products. Some 140,000 US patients received Sovaldi in 2014, the highest ever recorded for a single product in a single year.

	 The company forecasts that this year more than 250,000 new patients in the US will be prescribed either of the two products, with 

 out in front of Sovaldi. “Payers have gotten to grips with budget planning, so we expect more patients at less advanced stages of the disease will be placed on treatment,” said Johnson. Gilead has inked 2015 contracts with all but one of the big PBMs-Express Scripts went with AbbVie’s 

-giving its two products exclusive exposure to around 80% of the covered lives in PBM commercial plans. These arrangements also provide access to more patients with lower HCV fibrosis scores, broadening the potential treatment pool. 

	What this says is, far from being immovable on price, Gilead is now aggressively discounting its products to beat market competition, particularly with the biggest customers. Rebates on the wholesale price of 

are expected to average around 46% this year, and more than 50% on the public Medicaid and VA accounts, a segment where Gilead intends to boost its share of scrip. Volume-adjusted pricing is the norm for the HCV business in Europe. Gilead is also ratcheting up Support Path, its subsidized US patient access program on HCV, which offers eligible patients co-pays of as little as $5 per month, particularly among those with no or partial insurance cover.

	Acknowledgment of these concessions from top management early this year caused a temporary blip in Gilead’s market cap, suggesting that the company will not be immune from investor pressure going forward. Nevertheless, from a strategic standpoint, Gilead can count on four positive currents: (1) leading edge science; (2) a big pool of poorly diagnosed patients; (3) a progressive suite of carefully differentiated products; and (4) a patent fence that, in 

	Ultimately, any agenda in pharma should begin around the patient. So it’s fitting to conclude our Brand of the Year profile by relaying a 

dialogue with another HCV survivor, Charlotte Stewart, an avid traveler and active grandparent who was diagnosed with the virus in 1998. “In a routine physical, it was discovered my liver enzymes were elevated, which led my physician to test me for HCV. When the results came back positive for the virus, I finally had an explanation for the fatigue, aches, and recurrent infections I had experienced over the past year, which had me continually popping antibiotics.” Soon after, Stewart commenced no less than five different interferon-based drug regimens lasting for another 15 years, all of which temporarily suppressed the virus but ended in relapse, while causing side-effects that simply aggravated the virus’s underlying symptoms. 

	It was a chance meeting with a physician investigator on a clinical trial that brought her to 

. As a trial subject, Stewart received the drug for free. Four weeks into the 12-week, once-a-day, single-pill course of therapy, her viral load fell to undetectable levels; at 24 weeks, post-treatment, she was told she had been cured. “There were no side-effects for me whatsoever; at that four-week stage I knew instinctively that the dead weight on my body I had borne for years was gone for good.”

	Stewart contends that social factors have diverted resources and attention required to address HCV at its root. In addition to “victim stigma,” there is the “physician avoidance trap” induced by the historic lack of treatments that can be tolerated by patients. “My doctors kept telling me that if your symptoms didn’t progress, you were OK, which was a completely false narrative. The truth is they didn’t want to take ownership of remedies that might actually make me sicker than I was. It is good that the emergence of a cure is finally moving the physician-patient dialogue on HCV in a much more positive direction.” 

	What does the cured Stewart want to see next from the drug industry? “A vaccine would be the ultimate prize,” she says, “because ultimately the only way to defeat this disease is preventing it.” Second, is supplementing science with active community involvement in educating providers and patients about HCV-and how it now can be cured. “Industry has to become a better communicator,” Stewart affirms. “Getting people tested is critical and the policy/legislative agenda must be primed to reflect that fact.” A freshly minted patient advocate for the American Liver Foundation, Stewart offers a solution captured in a simple three-word missive: “Discover to Treat.”  

Features

Pharm Exec’s 9th annual Brand of the Year selection is Gilead Science’s back-to-back cures for HCV. We profile how both drugs reversed expectations around the listless product launch and revived industry reputation for startling breakthrough innovations.

Pharm Exec's 2015 Brand of the Year: Sovaldi and Harvoni for Hepatitis C

, Gilead Sciences offered a single overriding goal for the hepatitis C virus (HCV) franchise over the next 18 months: to drive science that will lead to better regimens for treatment, especially for those patients who have been diagnosed. “Our emphasis is on access, which informs our entire strategy, from physician and patient liaison to price contracting with the major payers,” Joe Steele, Gilead’s vice president of commercial operations, told 

Phase III trial results are due later this year on an investigational single tablet regimen (GS-5816) that will cover all HCV genotypes. Development programs are also in place to cover patients co-infected with HIV, and for other non-viral liver diseases, including non-alcoholic steatohepatitis (NASH), primary sclerosing cholangitis, and advanced liver fibrosis.

 Gilead intends to build on non-promotional campaigns like the “Forget me Not” ads introduced last year to make sure untreated patients are aware of the options now available to them. “We think an empowered patient able to ask the right questions of providers is fundamental to defeating this disease,” notes David Johnson, VP for US sales and marketing in Gilead’s liver disease business unit.

	This month, Gilead will launch a new branded DTP campaign on Harvoni that includes television, print, and digital advertising around the message tag “I am Ready to be Hepatitis Cured.” According to Mike Rutstein, CEO of STRIKEFORCE Communications, the creative agency for the campaign, the effort seeks to connect with and empower patients through a message based on understanding combined with insight about the condition. “Patients are ready to stop living with the uncertainties of HCV. They no longer want to wonder whether or not they should seek treatment, but to move forward to a cure. And

is what they’ve been waiting for.” Echoing Johnson, Gilead spokeswoman Amy Flood says “our goals in this campaign are to encourage patients with HCV to connect with a qualified health provider and support a better conversation to increase understanding of their condition and explore treatment options.”

	Elsewhere on the stakeholder front, Gilead is supporting work to update specialty professional practice guidelines on HCV. Finally, it has established ties to HCV advocacy groups like the American Liver Foundation and the National Viral Hepatitis Roundtable to amplify the patient voice on access to HCV cures.

Leveraging the US distribution chain to increase HCV adherence.

 Gilead works through specialty pharmacies on the basis of an open channel model-any specialty pharmacy can access its HCV products. Says Johnson, “such relationships provide real value in not only helping patients get their script filled but also serving as a go-between with insurers. Together with our own Support Path assistance program, we help patients get what they may be entitled to in terms of co-pay relief and discounts.” Solving the payment riddle leads to higher rates of adherence, which is also advanced through work the participating specialty pharmacies do with Gilead in coordinating take-your-medicine call backs and refill reminders.

 Despite its broad footprint globally, HCV expresses differently at the regional and country level: Egypt, which has the world’s highest rate of HCV infection, due largely to needle exchanges during a major outbreak of schistosomiasis in the 1980s, has one prevalent genotype; Japan and Italy have another. Japan is a key market target this year, and regulatory approval of Sovaldi in March now gives the company the opportunity to build a major business presence in a country that has the industrialized world’s highest incidence of liver cancer, caused by HCV. “Due to the HCV opportunity, Gilead now has a fully-staffed, permanent subsidiary in Japan, and we expect the Sovaldi authorization will be followed by approval for Harvoni by the third quarter,” says Steele.

	Gilead is taking a special approach to marketing its HCV regimens in the developing world, having negotiated licensing deals with 11, mainly Indian, drug partners. The arrangements grant licensees authorization to manufacture, price, and market clinically approved versions of Sovaldi’s API in 91, mostly poor, countries. The deals exclude many of the larger middle-income emerging countries, which has attracted criticism from the World Health Organization (WHO) and advocacy relief groups like Medecins sans Frontieres.

Gilead outlines its key access initiatives for its hepatitis C franchise.

Next Steps on HCV: Gilead’s Four-Point Plan

	Despite its underlying importance to the very survival of the R&D industry, market access has not received the attention it deserves as a living, strategic function, with its own embellished litany of shared learnings and “best practices.” One prominent industry practitioner, Ed Schoonveld, currently a managing principal at ZS Associates, has moved to fill that gap with a new, second edition of his 2012 book, 

Editor-in-Chief William Looney talks to Schoonveld about the key policy and management issues around market access, and what he sees as a necessary effort to take this relatively new set of pharma capabilities to the next level-from theory to practice.

 The second edition of The Price of Global Health was published in January. What in the global pricing environment has changed in the three years since its initial release? Is a comprehensive market access strategy now the norm in bringing a new compound forward to commercialization?

: Yes, market access strategy is now a regular part of the conversation in pharmaceutical company launch strategy. It has become a necessity due to significant changes in the way all payers-public and private-negotiate market access and pricing conditions with individual companies. Examples include the AMNOG legislation in Germany, which ties drug pricing for new medicines to strict requirements around demonstrated benefits; formalized medical/economic value requirements in France; the launch of a vigorous debate on the definition of “value based” pricing in the UK; the fiscal crisis in health systems and the subsequent mandated price cuts, coverage restrictions, and patient contribution increases in Europe’s economically ailing southern tier; and, of course, reforms in the US designed to drive down health costs through integration of the provider and payer roles, aligning spending to outcomes.  

	The US remains the lodestone of the global medicines market, so the transitions taking place there will carry a disproportionate effect on future industry profitability. Clearly, the 2010 Affordable Care Act is structured to not only provide health insurance to a broader population, but also to generate savings through new, more efficient players like Accountable Care Organizations (ACOs). ACOs are incentivized to monitor drug spending per indication, with the aim of wresting the fat from high-volume prescribing for major chronic conditions. The idea is that any savings can be shared between payers and providers. With the influx of many new high cost biotechnology therapies, we see more interest in professional medical societies like ASCO in setting ground rules on pricing a new drug therapy-the so-called “value algorithm." It follows naturally that physicians are slowly becoming more comfortable in considering cost as a factor in prescribing, particularly as they face more patient complaints over the high cost of medical and drug therapies.     

	Finally, there is the excitement generated by new drug technologies and the opportunities for treatments tailored to an individual’s specific disease profile. This means that specialty medicines-high cost drugs for small populations-are going to factor more prominently in the market. The onus will be on the specialty innovators to demonstrate value, not simply in terms of a treatment indication, but on the overall health outcome. 

	Some of these technologies will actually cure a condition rather than slow or arrest the symptoms. How does society address the budget impact of drugs that cure, but at a high up-front cost? In my view, society is heading for a “perfect storm,” between the opportunities driven by better science and the means of paying for them. Much of the burden is going to fall on the patient, through increased out-of-pocket costs per prescription. 

What about the information revolution in healthcare and the growth of advanced data analytics that give payers greater control over pricing negotiations? How is this trend shaping the market access environment? 

: Good information is a prerequisite-a must have-for an efficient, value-based health system. I am convinced this trend is beneficial overall, because as a research-driven industry, we live or die on the basis of evidence. Nevertheless, there is a danger that the expectations around evidence will exceed what we can test and measure: by definition, the “real-world” evidence that payers want is impossible to provide at the time a new product is launched. We must be careful that this enthusiasm for real-world data does not end up impeding acceptance of new drug agents in the marketplace. It’s simple: if you insist on a pure, evidence-based algorithm to determine access, then no new drug will qualify. The industry embrace of big data could come back to bite us by fostering the assumption that we can guarantee a product’s value before it is exposed to actual clinical practice.    

How prevalent is the transfer of market access precedents from one region to another? Is Europe driving new approaches to cost control that will ultimately be adopted in the US, or are we seeing the opposite? 

: The idea that regulations spread automatically from one region to another is an overstatement of the facts. The US healthcare system, not to mention the culture of medicine and patient care, is different from what exists in Europe; neither region strives to emulate the other. What does exist is a higher level of mutual awareness of what regulators in each region are doing, a trend driven by more and better information. Everyone is acutely aware of trends like comparative effectiveness requirements, or therapeutic reference pricing. But the questions posed will differ and thus so will the answers that national systems enact, in the form of laws and regulation.    

	Areas where there is alignment tend to occur around procedural definitions at the clinical setting. This includes the way you select an appropriate comparator in a clinical trial, or the promulgation of professional disease guidelines. Industry should be pushing harder for alignment around comparators because when you have common rules across markets, it is easier to manage a clinical trial. Imagine how much more expensive it is to run a clinical trial when France, Italy, or Germany each insist on a different standard comparator within the same protocol.

Can you point to countries that are currently taking a novel or innovative approach to market access? 

: Germany is struggling with its strategy around orphan drugs for rare diseases. The law provides a fairly generous relaxation from price regulation for these drugs, so long as the annual volume cost of supplying them to eligible patients is below €50 million. What is interesting is the level of support for a more liberal philosophy in increasing the level of access for patients with rare diseases. The desire is to address the ethical aspects without ending up with too many drugs qualifying for orphan status.

	In a larger context, Germany continues to struggle in making the management of total patient volume exposure a predictable budgeting exercise. The federal AMNOG price control process lacks control over the patient population that qualifies for coverage under a “negotiated” price. The fallback is simply relying on what the drug label says, which is usually very broad language, but this clashes with the strict volume quotas applied by individual sick funds. This perpetuates planning uncertainty around the drug budget cycle. That then becomes an industry problem as well. 

	What is interesting to me is the evolution of many of the emerging country markets in market access. Many are trying to erect a functioning universal healthcare system from scratch, which means governments are committed to trying new things when it comes to pharmaceutical P&R. China is deregulating pricing for some categories of medicines and it is supporting privately-sponsored funding mechanisms like the alliance between Roche and Allianz on an insurance model to increase patient access to expensive oncology drugs. However, the great majority of patients still pay out of pocket for innovative specialty drugs. In India, you have some interesting multi-branding experiments to segment between markets. In Brazil, the pharmaceutical market is now evenly split between the public Sistemo Unico de Saude (SUS), driven by pure health economics, and the US-style supplementary private insurance market.  

What other factors continue to surprise you about the market access environment? 

: A big one is the persistence of European governments in emphasizing price controls to manage the drugs budget. It is thoroughly wrong-headed to put the onus on price. Managing the level of reimbursement exposure is what matters. The prevailing order based on individual country price controls combined with acceptance of third-party parallel trade is nonsensical-akin to explaining something to someone from a different planet. Only the insular academic bureaucracies that manage national health systems in Europe could come up with this kind of inconsistent regime.   

	No one seems to recognize the contradictions built into almost every dialogue in Europe about reforming access to medicines. You can sit and talk for two years in the UK about institutionalizing “value based pricing” at the same time as other parts of the system are pressing for the removal of patient access programs that address some of the shortcomings of the current system. Or you can launch a dialogue around more support for R&D innovation without ever addressing local price regulation of new drugs that may end up choking off that drive to innovate. Government payers must actively think about and collaborate on reinstating some very simple market mechanisms that drive consumer and industry behavior at its most elemental.  

Your book emphasizes “story development” to convince payers a new medicine will deliver value to patients.  How do you do it?  

: I make the point that drugmaker communications on value are unfortunately reminiscent of the dossiers that companies submit to regulatory authorities-vast data dumps accompanied by equally prodigious efforts around dozens of power point slides. This is not the way to convince payers to work with you; the mindset is all wrong.  Instead, the focus has to be on simple messaging-hooks, really-that link to the individualized interests of the communities you need to convince to adopt and use your drug. The narrative is vitally important. I have seen so many company payer submissions that are organized on the basis of distinct topics, when what you must do is build a compelling story linked to human interest-a story that flows.  

	Another requirement often neglected is creating awareness about the condition, not just the product. You have to present the product as a solution to an underlying unmet need, which is a challenge because the medical community is resistant to addressing situations that they cannot treat or cure. No physician wants to sow panic in his patients. Thus, the pressure is on the drugmaker to do two things: show that an unmet medical need is actually a problem, and then present a solution that resolves the problem. If you don’t succeed in raising that fundamental issue of awareness, you won’t have a market for your medicine. And it takes years of effort to achieve it. It cannot be accomplished a few months before launch. 

How well is the industry doing in responding to the changes in the market access environment. What can companies do to up their game in achieving maximum access at prices that adequately reflect their investments in innovation? 

: The talent, expertise, and organizational capacity are strong. Where the industry falters is the continuing hit it takes on reputation. Drugmakers seem to face more public pressure than the gun and tobacco industries. All three industries market products relevant to health status; one industry heals, the other two kill, yet perceptions fail to reflect that stark discrepancy. Failure to turn that sentiment around gives a free pass to critics who advance simplistic arguments about company profiteering at the expense of the consumer. 

	Reputation is often misrepresented as just a public relations problem-it is much more than that. Reputation affects this industry’s basic license to operate. It’s one reason why the industry often doesn’t get the support of governments in confronting the theft of IP rights through compulsory licensing, as practiced by India. In my view, the US government needs to make its opposition to anti-IP rules more prominent, or we face this becoming a real constraint on the global competitiveness of US companies in emerging country markets, the source for much of the industry’s future growth. 

	Value creation is the best argument drug companies can make.  The problem is how the industry engages on this front:  the focus is on weighty technical dossiers rather than clear messages tailored toward the stakeholders that count.   Those stakeholders are increasingly diverse and differ on the basis of therapeutic segment as well as geography.  Getting to the right people with the proper message is more difficult than it appears. It’s all about humanizing what we do. 

Are you saying that evidence is a secondary factor in the proposition around value?

 No. Duality is at the heart of any compelling case for value. You have to make sure you craft a great, audience-appropriate story, and then back it up with solid evidence. Market access people must be acutely sensitive to where the weak spots are in each area of medical practice. For example, in oncology, precedents like the new ASCO value algorithm demonstrate that a new drug offering little or modest differentiation against current therapy is not going to be taken up if its pricing fails to reflect that.  Pricing also has to be in line with the position of a therapy within the growing number of clinical practice guidelines; individual physician choice is less and less relevant to what products get used. 

 Co-pay offset coupons that companies provide to maintain patients on branded medicines have emerged as a hot topic of debate with payers. How do you see this debate playing out here in the US? 

 The industry has made extensive use of these programs to reduce co-pays and thus eliminate disadvantages associated with an unfavorable formulary tier placement. Their effectiveness has made some drug companies more comfortable with accepting an unfavorable tier, using the coupons to level the playing field against competitors with a lower co-payment. Companies must realize, however, that the market is changing: in competitive therapy classes, outright exclusions from PBM coverage are becoming common. Exclusion lists give plans significant negotiation leverage, provided that the physician community accepts a more limited set of prescribing options. Other healthcare plans are making more extensive use of step edits and prior authorizations to guide the “appropriate use” of drugs, which also effectively blocks co-pay offset programs for their covered patients.  

	Hence, it is critical that companies prepare for a world where these coupons will be much less effective in preserving share of script. The implication is companies must focus on that robust value proposition aimed at payers, physicians, and patients, rather than relying on the coupon as a fallback. Given the current wave of physician objections over high retail drug prices and the incorporation of cost considerations-the “financial toxicity” proviso-in clinical treatment guidelines, intensive outreach efforts will be required to align the medical community behind favorable inclusion of new treatments in these guidelines and on progressively more restrictive payer formularies.  

Looking three to five years ahead, how do you see the market access environment for drug innovation shaping up?

 The biggest change is the requirements around evidence-these are going to be both more numerous and more complex. Payers will continue to develop precise methods to limit a drug’s authorized use to that population most likely to experience a positive clinical outcome. That will tend to narrow the size of the potential market, so companies will be compelled to shape the process in a way that enhances the potential for additional indications beyond launch. 

	Payers are not comfortable with implementing precision medicine protocols alone, which is why the intervention of clinical practice organizations like ASCO will escalate. The medical profession is now a more direct part of the market access dynamic-there is no going back. 

What about the activities of PBMs to extend the reach of restrictive or closed formularies for their covered patient populations? Will this prove to be the norm three years from now? 

 We have to examine this trend closely, to see if the exclusion of some therapies is accepted by the medical community and employers who rely on PBMs to manage their drug cost exposure. Indications suggest the number of covered patients actually affected by the exclusions is currently quite small: what is the share of the plans the PBMs are managing that fall under these restrictions?  PBMs don’t wish to find themselves defending a decision to rely on only one covered drug per indication because they know the medical profession finds this incompatible with their ability to make the best clinical judgment for patients.

	We will see a lot of give and take around this point rather than the alternative of “one size fits all” solutions imposed by the PBMs. The politics of medical practice can trump their increasing market power, and more people are aware that PBMs have a narrow, expense-driven, short-term orientation that takes no account of the medical cost savings that new drugs achieve from a health outcomes perspective. Looking ahead, the industry has to be more public and aggressive in bolstering that fact, with messaging backed by evidence.

What’s new in the growing field of global market access?

Pricing’s Point Man

	Today’s era of slow, incremental sales growth presents pharma “c-suite” managers with a fundamental question: where-and how-can we tap new revenues to generate the higher profits that shareholders expect? One opportunity with potentially broad reach is the large bloc of consumers represented by the rich ethnic diversity that anchors the US population of more than 300 million. 

	What we call the “multicultural”  or “cross-cultural” constitutes the largest, fastest growing consumer segment in the US market, with significant treatment gaps across therapeutic areas that not only represent potentially millions of new script but also create a strong brand upside as well as a reputational boost from the opportunity for pharma to improve patient outcomes on a national scale. The multiethnic segment is also in the vanguard of the consumer movement when it comes to digital, mobile, and social media use and when communicated to in a relevant way has a higher promotional response. In an effort to gain first-mover advantage, the number of pharma companies investing in multiethnic marketing has tripled within the last decade; but there is still a problem: this pivotal group is not being reached and impacted effectively with the tools of engagement currently employed by big Pharma.

	Yes, this is not a new topic for the industry. A “reach out” to multiethnics has probably been included in a  brand plan or two, but never quite makes the cut. Perhaps this marketing area felt interesting to you at first, but when it came down to it, the demographics were not tangible enough to fully understand the profit and loss (P&L) impact. I remember years back, as a sales rep in Brooklyn, NY, sitting in a doctor’s office amazed at the level of diversity of patients in the waiting room: Hispanics, African Americans, Chinese, Koreans, Russians, to name just a few. But what was most interesting to me was the thirst for information these patients had and the lack of information available that could speak directly to these consumers. 

	Being an immigrant myself, having moved to the US from Ukraine in 1990, I knew what it was like to be in a new country, with its different customs, language, and processes. That’s when I decided to dedicate my time and passion to building methodologies and strategies that help my industry colleagues brand teams see multicultural marketing through a focused pharma lens. Specifically, the dynamics of the multicultural markets needed to be quantified in Rx sales terms and positioned in context of an Rx strategy. After heading up multicultural marketing capability for Novartis Pharmaceuticals Corporation, followed by working at leading multicultural agencies, and working on over 30 Rx products specifically in the multicultural category on the client and agency side, I have found that the sales upside can be anywhere from $100 million to over $1 billion per brand. To clarify further, I do not mean the size of the market; I specifically mean a brand specific, incremental sales upside. Given this scale, the conclusion is obvious: the multicultural segment should not just be a tactical marketing mix consideration, but a strategic business development opportunity, initiated and endorsed at the  corporate level.

	Clearly, there is much room for growth. Historically, big Pharma has not leveraged the US multicultural market place in the way that the finance, travel, CPG, auto, and communications industries have, investing hundreds of millions annually per company. As an example, in 2012, looking at the top 50 spenders in the US Hispanic market alone, the investment range is $30 million to nearly $300 million per company annually, none of which were pharma companies. Why? Multicultural marketing models driven by non-pharma industries did not apply as effectively to pharma due to the other industries different stakeholder mix, specialized analytics, highly restrictive regulations, and unique consumer insights and behaviors. Due to these differences, the business case built  for pharma brands was not sufficient to persuade managers to invest. 

	But the question remains, why not invest? Let’s put things in perspective. The combined multiethnic segment represents over a third of the US population,  a bloc nearly the size of Russia’s entire current population. Population wise, the US Hispanic market alone is larger than Spain, and it’s expected to more than double by 2050. We literally have an “emerging market” in our back yard.  

	The good news is that although the industry is a bit behind, the needle is certainly moving in the right direction. Five to eight years ago, a few of the major pharma companies started taking a closer look at these market segments.  By now, certain organizations have been willing to invest in the multicultural platform as a part of an in-house innovation initiative. 

	Companies such as Pfizer, Novartis, and Merck & Co. launched a multiethnic or multicultural corporate strategy, while an additional one or two firms have made isolated brand investments in a given year. Fast forward to 2015, we have at least 15 pharma companies now consciously investing into multicultural markets on a brand level; at least 40% of these companies are either exploring or already having a corporate strategy across brands. Hence, labeling multicultural as an exploratory innovation initiative is no longer the case for the industry, but is instead a competitive advantage.

	Being first to market is one of the key drivers in securing a leading market share for a given segment. The time is ripe. There are certainly more companies investing, but we are not at a point where the market is cluttered. In other words, there is still plenty of space to gain that first mover advantage and build brand trust and loyalty with this consumer segment.

	A similar dynamic has been observed in the retail space, and interestingly enough, over the past five years Walgreens, CVS, Target, and Wal-Mart have all established multicultural operations internally with targeted investments in various cultural segments. A coincidence? Probably not. Three major events in the past seven years have significantly heightened awareness and opportunity within the multicultural health segment overall. First, in 2008, the US presidential campaign showed the power of marketing to and building brand loyalty with US minority populations. Second, in 2010, the US Census came out with the latest population projections highlighting the tremendous growth of minority ethnic and cultural communities. Third, the Obama administration’s Affordable Care Act (ACA) further heightens the opportunity specific to the multicultural health field.

	As we look to expand this opportunity further and prepare for brand planning, common topics that often come up for discussion include the following: are traditional marketing efforts sufficient enough to impact these populations, in a positive or negative way? Is scalability of the opportunity sufficient, given the company’s available resources? What are the misconceptions about insurance coverage and use of technology among these groups? And, lastly, where does the budget come from?

 One of the most important aspects of pharma marketing is the understanding of the patient journey and how this journey may differ across disparate patient types. After analyzing the differences in the patient journeys for Hispanics, Asians, and African Americans in therapeutic areas such as cardiovascular and metabolic, vaccines, oncology, hematology, respiratory, Alzheimer’s disease, rheumatoid arthritis, hepatitis, multiple sclerosis, and others, we find there is a common thread, which points to significant gaps across cultures within diagnosis, treatment, and adherence rates. These gaps are also known as healthcare disparities. 

	Certainly not in every case, but in most cases, at least one of the key parts of the patient journey has significant gaps. At times, the gap is in awareness levels, or perhaps the treatment rates across cultures compared to the non-Hispanic white patients is a lot lower. These gaps can be quantified in financials down to a brand level with the idea that if the gap can be closed, there is immediate financial upside to the brand.  

	The key part here is that to close some of the gaps, an incremental investment is needed to specifically target these audiences, since traditional efforts are clearly less effective in these populations. To use a tactical example within media, using Nielsen, when applied to unduplicated TV viewers, in prime time, across the top 10 English language networks compared to top Spanish language networks, about 70 % of US Hispanics 18+ are only watching Univision. The data thus shows that traditional investments like English language TV are under-reaching this audience. 

	Furthermore, for the 30% that may be reached by the English language networks, the question is how relevant is the message-can the impact of the creative be even stronger? In a Nielsen study conducted in 2014 across OTC ads that advertised in both Spanish and English, for adults 18+, Spanish language ads outperformed English language ads in brand recall, message recall, and likeability. The takeaway message on this topic is, (1) multicultural audiences are significantly under-reached by traditional marketing efforts; and (2) for the small number that is reached, the message may not be resonating as well.  

Let’s start with the US Hispanic market, comprising about 55 million consumers and which is expected to more than double by 2050. If this bloc were a country, it would be the 16th  largest economy in the world. The African American market is about 42 million consumers and is also growing faster than the non-Hispanic white segment. Using the gap analysis exercise from the previous section, a patient journey gap for Hispanic or African American markets can range anywhere from $100 million to $1 billion per brand. What this simply means is that if through corporate marketing efforts these journey gaps can be closed over time, one brand can bring over $100 million annually as incremental sales.  If there are multiple brands in a corporation, the upside is in billions.  

	Let’s put this in perspective. From a business development view,  a corporation can spend hundreds of millions of dollars on R&D to bring a new drug to market and then make $500 million annually in peak sales, through a loss of exclusivity. Here, you can take an existing brand and invest less given the brand is already in market, but the upside is equal or better, making your overall ROI stronger over time. In addition, this upside is purely from closing the gap between the given culture and the non-Hispanic white population. This does not include any other upside that may naturally come from promotion, which would be icing on the cake. 

	For the Asian market, the story is a bit different. The scale is not as significant. However, the ROI is tremendous. For example, a standard recommended investment within the Chinese market place is about $400,000 to $600,000 annually, but the ROI seen on these investments could be closer to a 4:1. In this case, the question is not of scalability, but merely choosing a better investment in your current marketing mix (e.g., when looking across all the tactics that are in the $400,000 range, what tactics are returning lower ROIs-or do you know what the ROI is across all the tactics of $400,000 and under?) I challenge everyone to ask this question, as investing in the various Asian segments, or the US Russian speaking market, may drive a stronger ROI versus existing tactics in the marketing mix. 

	For companies that have invested consistently every year and maintained a strong investment level across ethnic groups and cultures, they possess  disproportionate market shares within the cultures they have invested in. What’s most staggering is the potential scale upside for the brands and a huge win for patients. The impact of even moving the needle in closing some of these gaps is a tremendous turning point in patient outcomes, from quality-of-life benefits to improving survival rates. This is “patient centricity” at a whole new level, as here we have an opportunity to connect with patients in a highly individual, targeted way.

 This is a really easy one to parse. As of 2013, health insurance coverage rates across population segments are illustrated in the chart below. The biggest question on everyone’s mind is the insurance coverage for the US Hispanic group. The rate is actually 76% coverage, compared to 87% in the white population.

 Certainly it’s lower than for non-Hispanic whites, but the real point is that the vast majority of these people are covered. Also, considering the scale and future growth, the numbers are very strong and are from 2013, which does not account for full ACA impact.

Generally speaking, multicultural consumers are not only on par with non-Hispanic white consumers, but are leading the total US population in various consumption behaviors within digital, mobile, and social platforms. Certainly, there are variations when we start to break consumption down by channel, by age, gender, etc., but overall the multicultural consumer tends to over-index in various areas.

		US Hispanics watch more video than non-Hispanic consumers, are more engaged on mobile use, and are the most active users of social media networking sites.

		70% of African Americans and 71% of Hispanics own a smartphone,  versus 61% of non-Hispanic whites. 

		73% of African Americans age 18 or over versus 72% of non-Hispanic whites use social networking. 

		22% of African Americans age 18 or over Tweet versus 16% of whites.

		Asian Americans have a higher smartphone penetration and adoption of tablets than the overall population. 

No question, this is a tricky and potentially sensitive topic. My recommendation is to create an internal risk-share model where the initial investment, “pilot,” “test,” and “proof of concept,” is co-shared between the brand budget and a matched amount of funds allocated outside of the brands. This way, there is shared accountability and a guarantee of internal brand team support, along with sufficient funding for an initial investment.  

	In allocating your investment, the last thing you want to do is to shortchange your test. Typically, this can cost anywhere from $500,000 to $3 million. But what’s most important is the mindset going into this test, which is not only to see whether this works or not, but more to learn, optimize, and scale up. Scaling up can mean finding funding in the millions of dollars, which in most cases the brand budgets will not be able to support alone.  This is where we have to make a call beyond the brand teams promotional spend. 

	Given the significant upside of the opportunity in most cases, an incremental budget allocation is needed.  However, the spirit of this allocation is not just about the typical promotional spend increase. It’s a business development opportunity. As is the case when  bringing a new brand to market and being in a pre-launch stage, new budget is allocated. Similarly, with this potentially being a billion-dollar upside for a company over time, an incremental investment outside of the current brand team’s funding is certainly worth the commitment. 

	Engagement signals strong: Don’t miss out

	In summary, the multicultural segment is the largest, fastest growing consumer segment with significant treatment gaps across therapeutic areas that collectively are worth billions of dollars in pharma revenues and profits. This creates a tremendous opportunity for pharma to improve patient outcomes on a national scale. The multiethnic segment also happens to be a savvier player when it comes to digital, mobile, and social media use, but it’s not being reached and impacted effectively by current practices. The evidence does show, however, that when communicated properly, the multiethnic cohort delivers a higher promotional response. We are at a point where not investing is not just a financial miss, but a driver of competitive disadvantage. Changing that dynamic through a solid  investment is worth it. It may be the largest marketing mix opportunity for the industry in an era of declining expectations. 

is President and Founder of Emcay. He can be reached at 

Tapping into the fast-growing and lucrative “multicultural” segment requires new and more aggressive approaches to brand planning and consumer engagement.

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