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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.

Life lessons

The recent problems of the generics sector have lessons for research-based companies too

Only yesterday, generics were the unstoppable behemoth, threatening to dominate the industry as they sucked up market share. But today, with dire news from Sandoz, Mylan, Teva and many other generic players, their model seems to be fading.

When low-cost business models struggle in a price-driven market, it ought to shake the complacency of those who talk about business model transformation as if it were as easy as changing your socks. In reality, it’s harder than changing your spouse. Reassuringly, however, the recent problems of generics, and their lessons for research-based companies, were predicted by my research into the evolution of the life science industry. So too were the lessons they hold for research-based companies. As usual, allow me a little Darwinian science and I’ll return to the harsh, practical conclusions.

Evolution makes choices. Not literally, but in effect it does. Back in time, my ancestors chose to have cell nuclei when those of my prokaryote cousins chose not to. Later, they chose spines, to have live young, mammary glands and walk upright when various branches of my family chose the opposite. That’s why you and I don’t look like jellyfish or sea turtles or any kind of cetacean. These choices were made to optimise survival, which in biology means grandchildren. And the key lesson to draw from biology is that clear choices are important. In the Amazon, sloths and piranhas, anaconda and panthers thrive because their ancestors ‘chose’ their specialised traits. Just as importantly, we don’t see creatures that try to be hybrids. There are no ‘slothranhas’ or ‘anacanthers’ because those chimeras would be outcompeted by their more specialised cousins. Evolution forces specialisation. We see the same thing in our industry, where the strategic choice between research-based and generic is a good example of this. Truly innovative and truly cheap drugs thrive but mid-range me-toos with minor differentiation can’t compete in a payer-shaped landscape.

But here’s the new thought for you: evolution never sleeps. Once a species specialises, evolutionary pressures force further specialisation. That’s why there are more than 30 species of piranha. And, in our industry, business models are also sub-speciating. My work counts at least 26 life science business models. It is this sub-speciation that explains recent news in the generics sector and, by extension, in research-based sectors too.

Being cheap is one way to survive, but only one firm can be the cheapest in any product category. It’s a binary, winner-takes-all approach. As such, it’s high risk. So evolution looks around for less risky variations on a theme, just as you, chimps and bonobos are variations on the ape theme. In the case of generics, we’re seeing four variations emerge. Fast followers, like the biosimilar companies, compete by living very close to the edge of the patent cliff. And we’re seeing the emergence, in Asia, of a sub-sub species of Frugal Followers that will make even cheaper advanced drugs. Eschewing those difficult-to-make products, some companies recognise that, in a world of small-molecule counterfeiting and non-compliance, trust is a differentiator. That’s the strategy of branded generics, which we call the Trust Leader model. And just beginning to emerge are the ultra-low-cost models called White Labellers, who will make products for other companies. That’s where, soon I predict, Amazon will enter the drug market and shake things up. In this low-cost, non-innovative habitat, the existing giants of generics are being out-evolved by a combination of their four more specialised cousins.

The lesson to learn is that evolution drives us towards complexity, constantly speciating the industry into evermore specialised and differentiated business models that will leave current models behind. In research-based pharma, we’re seeing the same divergence between those models sticking with new small molecules for large populations - the Traditional Blockbuster model - and those that combine multiple new technologies, such as those that my work labels the Secular Grail and the Budget Buster. That’s what explains the rise of companies like Roche, Gilead and Biogen and the relative struggles of Pfizer and GSK, among others.

Evolution weaves complicated pictures, but fundamentally it is a simple idea. Both biology and business will try lots of different things. Those variations on present themes will either be selected for or selected against by the environment. That’s true in both biological and business habitats. The successful one will thrive and be copied until some new variation, which fits the environment even better, comes along. It’s the lesson Charles Darwin introduced to us 150 years ago. It’s a lesson that management scientists Nelson and Winter picked up on in the 1980s. And it’s the lesson that we now understand explains the life science industry very well. It’s up to you to learn it.

11th September 2017

From: Sales

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