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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.

Great divides

The choices innovative companies make will lead to a fragmentary industry

The increasing diversity of our industry fascinates me and drives my research. The huge variety of company sizes, structures and strategies reminds me of the final paragraph in Darwin's Origin of Species, in which he contemplates how 'the elaborately constructed forms ... have all been produced by laws acting around us'. He was talking about the laws of biological evolution but if we could better understand the laws of economic evolution, it would enable firms to better manage their own evolution. And those laws are emerging from the latest research. Let me share the science with you before I come back to the practical implications.

Choosing to thrive
Evolution doesn't have a goal, as in a final design. But it does have a driver. Genes drive behaviour and traits to optimise fitness, the ability to survive and reproduce in their environmental niche. The analogue in evolutionary economics is risk-adjusted return on investment; firms adapt to optimise the balance between returns and risk in their given situation.

The diversity within a biological system tells us that, at a detailed level, there a lots of ways to optimise survival and reproduction. But within that complexity we can see a number of fundamental 'choices' made by evolution - vertebrate vs invertebrate, oviparous vs viviparous, eukaryote vs prokaryote for example. Each of these are 'choices' about the best way to survive and reproduce. I parenthesise choice because of course it is the result of variation, selection and amplification rather than deliberate choice.

Can we identify similar evolutionary 'choices' in the life sciences industry? Well it is beginning to look like it. If we look at the innovative part of the sector in particular, the cost of innovation and the associated risks make it especially important to make the optimal choices and, crunching my data, I can discern three big choices being made.

Three big choices 
The first of these big choices is between incremental vs discontinuous innovation. Some firms are choosing to work at the frontiers of science, in immuno-oncology for example, while others focus on incremental advances in well-understood science. The second choice is between technology focus vs integration. Some firms are concentrating on the pharmacology, others are integrating pharmacology with information technology, nanotechnology and other fields. The third choice is small vs large target population. The divergence between rare diseases and mainstream indications is an example of this. Note that, as in nature, no choice is intrinsically better than another. Each choice is a trade-off between maximising return and minimising risk. Only the environment can and will decide what choice (or set of choices) is the 'fittest' and it does this on a case by case basis. We can see this mechanism working in real time when, for example, an incremental innovator fails to get market access approval or when a highly innovative therapy fails expensively in late stage development.

Firms adapt to optimise the balance between returns and risk

The sum of all choices
Although it's unlikely that life science industry executives think in terms of evolutionary economics, they make these choices, consciously or otherwise, all of the time. In effect, strategy is choice-making and firms vary in their choices. Similarly, the market environment selects these choices all of the time, again without thought to how Darwin would have described it. Finally, the selected-for choices are amplified, because other firms observe and copy. This variation, selection and amplification process is, by definition, Darwinian evolution and, in both nature and business, it leads to speciation. It's just that in business we call a species a business model. Our current industry business models are the result of millions of choices in past decades and our future industry models are emerging now from the sum of our recent and future choices.

The dilemma choice
So back to the practical implications of this. There are three. Firstly, just as biology diversifies species, so economics will diversify business models. Our industry will therefore fragment with great divides between business models. Secondly, firms will need to choose their model since, in both nature and business, hybrid compromises tend to fail. Finally, new research means that we can now begin to see the choices that need to be made; my three dimensions of innovative choice, described above, are part of that. This new knowledge allows industry leaders to identify the options, understand the implications of each and make more informed choices. This means that, unlike evolving animals, firms can make deliberate, intelligent choices about acquiring and adapting traits. The fact that they can do so does not, of course, mean they always will.

Article by
Professor Brian D Smith

He welcomes comments and questions on this column at brian.smith@pragmedic.com

1st July 2015

From: Research, Sales

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