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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.

Amazon’s invasion

Jeff Bezos’ new move isn’t the problem you think it is - it’s worse

Unless you have been blindfolded with your fingers in your ears, you can’t have missed the fuss about Amazon entering the pharma market as a new channel. This is understandable. Jeff Bezos’ organisation is incredibly competitive and the disruption it has caused in every market it has touched is a business phenomenon. To discount the threat of Amazon, even if it hasn’t entered your market yet, would be naïve. But it’s no good just being alarmed. Strategists in the life science sector need to understand the implications of Amazon’s entry. As usual, I take an evolutionary perspective on this. Bear with me while I take a Darwinian detour before returning to the real-world implications of recent events.

Let’s start with what we know or can be reasonably sure of. Amazon isn’t new. It’s over 20 years old. But it’s new to our industry. And its track record in other sectors, from books to toys to food, strongly suggests it is not going to start inventing and making medicines. Bezos is great at understanding and applying his core competences, which lie in supply chain and retailing to consumers, almost irrespective of the product sold. So, we can see Amazon entering the pharmacy supply chain, much to the terror of pharmacy benefit managers, drugstores and other players in the USA’s convoluted system. So, for most of the readers of this article, working in companies who invent and make medicine and medical technology, this might not seem an immediate or serious threat.

But now let’s look at this situation through the lens of evolutionary science. Then, we see Amazon as an invasive species, one that evolved in another environment and is now encroaching on our own habitat. Invasive species enter that part of the new ecosystem to which their previous evolutionary path makes them well adapted: in Amazon’s case the last part of the supply chain. When they do so, they have an immediate impact on the species currently occupying that ecological niche. That’s why pharmacy distribution channels are so nervous. They fear the sort of mass extinction analogous to what happened in 19th century Australia when Thomas Austin introduced just 24 rabbits to remind him of England. A couple of decades later, when rabbits had done what rabbits are famous for, many native species had disappeared. We see the same thing in forests that have been invaded by mimosa, whose canopy prevents native plants from growing. And these are just the direct effects. Invasive species usually have secondary and tertiary impacts. Australian rabbits led to extensive soil erosion. Mikania, the ‘mile-a-minute’ vine introduced in Asia, not only suppressed crop growth, it also caused the displacement of rhinos, tigers and antelope.

What do these interesting but apparently unrelated evolutionary tales have to do with the life science sector? They are great analogies to help us predict the future. If our industry follows nature - and the science says it should - then Amazon (and perhaps Amazon me-toos) will first dominate the supply chain, making older business models extinct. This will lead to two secondary effects. Firstly, prices of the things they sell (typically generics, branded or not) will plummet. This will change the comparative health economic equations for innovative products, that will then have to demonstrate better bang for their bucks than very, very cheap generics. Second, it will consolidate the sector that buys from life science companies. Instead of big pharma selling to many smaller firms that are trying to differentiate on service, they will be faced with one huge purchaser with an obsessive focus on price. Have you noticed that as your books have become cheaper, not only have bookshops disappeared but publishers’ margins have crashed? Just like rabbits and ‘mile-a-minute’ vines, the impact of the invasive species that is Amazon will have an impact that is immediately interesting but eventually overwhelming.

So, what should pharmaceutical and other life science companies do in the face of this invasive species? There are various defence mechanisms, all of which are forms of differentiation either of the product or of its extended value proposition. I have talked about this in my other PME articles. It begins with understanding the market’s contextual segments and the sort of value they seek. It ends with an integrated value proposition that it is segment-, not patient-, centric. But, in the face of the Amazon invasion, perhaps the best lesson that evolution holds for us is not to be complacent. As rabbits teach us, a threat doesn’t have to be immediate and direct to cause us problems. And since it takes time to respond effectively, we need to anticipate and pre-empt this change, not just observe and react to it.

15th December 2017

From: Sales

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