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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.

Under pressure

Life science companies must prioritise their response to market changes

Darwin's Medicine

I sometimes think there is an interventionist email God, deliberately choosing which emails sit next to each other in my inbox. So as I sat down to write this, two news articles popped in, separated by a slightly irate mail from a senior industry executive. Together, they both asked and answered an important question about the evolution of the industry. As usual, let me expand on this idea a little before I close with a practical recommendation.

The irritated mail, from an industry veteran I greatly admire was in response to an article I'd published recently about the six great selection pressures acting on the sector's business models (if you would like a copy of that piece, just ask). It began very politely (always a warning signal!) before saying (and I paraphrase): “I agree that these are the selection pressures but they all demand different responses! What, in practice, am I supposed to do?” I smiled and wrote an answer that went something like this.

The six great, industry-shaping, pressures are all equally strong and important. But they aren't equally important to every company. Allow me a biological metaphor: Global warming is leading to a rise in sea temperatures of, perhaps, 1-20 degrees.

To a tropical fish in abundant equatorial waters, this may not make much practical difference to its environment and little response is required. By contrast, a polar bear in an Arctic ecosystem that is shaped by freezing and thawing will need to respond or perish. Same phenomenon, very different real-world implications for different species. How does this metaphor apply in our industry? Well, consider those emails that sandwiched my irate friend.

The first concerned AstraZeneca's appointment of Cori Bargmann to the board. Well known for her criticism of the industry, Ms Bargmann will, I assume, both burnish AZ's reputation and help prevent potential abuses of public trust. This is an example of responding to a pressing selection pressure, which is that a sceptical public will punish companies who aim to sell very high-priced medicines  if they don't retain public trust. Such an appointment is therefore much more important for a company like AZ than it is for a cost-leading generic company, whose pricing may engender public approbation rather than disapproval.

The second email concerned the co-operation between mobile technology company Qualcomm and Roche. One of the goals of that co-operation is to make trials more effective, efficient and less risky. This is a reasonable aim for any pharma company but it is exceptionally important for Roche which, along with a handful of other companies, is trying to adopt the 'Genius' business model I have described elsewhere. Genius companies indulge in high-return, high-risk innovation. This means that a shift in gross margin of one or two percentage points has relatively little impact on overall risk-adjusted rate of return. But a reduction in business risk (for example, by improving trial effectiveness) can make a disproportionate improvement in commercial outcomes. So Roche's adaptation to the selection pressures caused by the 'Information Shift' (as I call it in my work) is much more important for them than it would be for, say, a market-following, less innovative company.

A sceptical public will punish companies who sell high-priced medicines

Both examples, I hope, illustrate the point that the importance of the many selection pressures acting on industry business models is entirely context dependent, just like the selection pressures implied by climate change.

And the practical implication of this? Well, as Winston Churchill is often credited with saying, out of intense complexities, intense simplicities emerge. Out of the innumerable changes we observe in and around the life sciences sector, about six major selection pressures emerge. Each of these favours some aspects of a business model and disfavours others. But even these six pressures combine to place conflicting demands on life science companies. Do we focus on cost reduction or innovation? Integrated or disintegrated business models? A company trying to meet all of these pressures equally and simultaneously will, inevitably, fail to meet any of them.

Instead, firms must consider which selection pressures have most impact on their business model. Is it globalisation or systems medicine? Value chain polarisation or networked competitors? The information shift or the shift to health economic value? Critical pressures must be addressed, secondary pressures can be managed. 

I hope my irate friend read my reply carefully. And, with luck, the interventionist email God will have sandwiched it in between others that reminded him of the pressures his business model faces. After all, he has much more to worry about than the articles of a geeky professor.

Professor Brian D Smith is an authority on the pharmaceutical industry and works at SDA Bocconi University and Hertfordshire Business School. He welcomes comments and questions on this column at brian.smith@pragmedic.com

20th March 2015

From: Research, Sales

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