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Darwin's Medicine blog

Professor Brian D Smith is an authority on the pharmaceutical industry and works at SDA Bocconi University and Hertfordshire Business School.

Friend or foe?

Payer relationship might have unintended consequences

Two interesting reports crossed my desk as I was planning this column. The first was about Express Scripts, a US pharmacy benefits manager, demanding risk-sharing price arrangements from pharma companies. It's another sign that big payers, who are consolidating, are starting to use their buyer power more. The second report concerned the Chinese pharmaceutical industry, which is showing signs of developing a true research and development capability.

Two very different things, in different parts of the value chain and on different sides of the world; but they are connected by evolutionary theory. As usual, allow me to talk about the theory a bit before I go on to suggest the practical implications for life science companies.

You have probably heard of the idea of co-evolution, when two species evolve together. Nature is full of interesting examples, like humming birds with long tongues and flowers with deep nectaries. The important point about co-evolution is that the two species didn't appear independently. They each evolved from two very different-looking species as one changed and the other changed with it. They are locked together in a relationship, much like the manufacturers of medicines and medical technology are locked together with the buyers, users and patients. And if you consider the history of healthcare, you can see that medical practice and medical products have followed each other on an upward spiral.

But that analogy of successful pairing isn't as encouraging as it sounds. You see, there are at least three classes of co-evolutionary relationship: competitive, parasitic and mutualistic. As the names suggest, some co-evolutionary relationships benefit both partners, others don't. Instead, the relationship consumes energy and resources that might otherwise be put to more beneficial use. I probably don't need to explain why it would be better for an industry and its customers to have a mutualistic relationship, in which they get better together, rather than a competitive or parasitic one.

If the humming bird won't try hard enough, a bee, moth or insect will

Mutualistic relationships
The biological analogue of the humming bird and the flower tells us something about how mutualistic relationships co-evolve. The flower nectary became gradually deeper and the birds' tongues became gradually longer. It was as if each party were sending signals to each other - “Just try a little harder and you'll get what you need”. And we see the same thing in the mutualistic relationships that evolve, for example, in the defence or aerospace sectors. Each party pushes the other but encourages too and makes it possible for the other to adapt.

I'm sorry to say that the relationship between payers and manufacturers in the life sciences sector isn't always quite as positive. Payers, through HTAs, often set standards for patient outcomes that are too much of a stretch, even for good products. Companies, in their pricing strategies, often seem more parasitic than mutualistic. It is as if the flower suddenly decided to put the nectar out of reach and the bird decided not to stretch. If this did happen in the biological world, both species would suffer in the not-very-long-term. It is not hard to predict analogous consequences in the life sciences market, with negative ultimate consequences for society.

Watching for signals
So back to the practical consequences of evolutionary, or co-evolutionary, theory. The key to making co-evolution work is some kind of 'signalling' in the sense of allowing some benefit for some adaptation. This has been observed not only in biology, between species, but also in economics, between industries and markets. And indeed we can see it happening in the best examples of market access strategies, in which the company demonstrates exactly how and where its product creates health-economic value and, in return, the payer agrees a reasonable price. In more sophisticated examples, the uncertainty that each side faces is mitigated by risk-sharing agreements. So, through an evolutionary lens, Express Scripts were sending signals to the manufacturers of expensive oncology drugs. And we've seen examples of companies reciprocating by various market access schemes and health economic outcomes studies.

Where does the Chinese news fit into this? Well if the humming bird won't try hard enough, a bee, moth or insect will. Somebody will want the nectar. So when traditional companies fail to co-evolve and keep prices high, it encourages the other, better-adapted species to evolve. In the case of the life science sector that species is likely to be a low-cost innovator and, if I had to bet, I'd expect it to emerge in China or India. They will have to work hard to become innovative, but they seem to be on their way to doing just that. And they might find it easier to innovate than their western rivals, with a culture of high costs and high margins, find it to be frugal.

Professor Brian D Smith welcomes comments and questions on this column at

6th July 2015

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