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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.

Generic Differentiation

Even in the cost-led market for generics, differentiated business models evolve

Some environments are so harsh, they constrain evolution. That’s why, for example, desert and arctic habitats have lower species-richness than tropical forests. Biologists argue about the detailed reasons, but it remains true that benign environments are more biodiverse than austere settings. But even the harshest environment has multiple species and my work finds this to be true in life sciences markets as much as in biological habitats. As ever, let me take you on a little stroll through the science before we come back to the practical implications.

When new species emerge, evolution is making a bet. When humans evolved from earlier hominids, it was betting that the higher risks associated with a bigger brain, which included higher energy requirements and more difficult births, would be offset by the returns of higher survival rates enabled by intelligence. As Steven Pinker describes it, we bet on the ‘cognitive niche’ as an evolutionary strategy. The same risk/return gamble is seen in business models. When Vasant Narasimhan decides that Novartis will bet on highly innovative therapies, he is calculating that the increased cost and risk, relative to traditional business models, will be offset by a higher return on investment. Different bets lead to speciation, called radiative adaption in biology, and this is leading to the emergence of 26 new life sciences business models. If you’ve come into this conversation late, just email me and I’ll send you the PME article that summarises this research.

But, as the tropical vs arctic comparison reminds us, not all habitats favour speciation to the same degree. In pharma for example, it has long been traditional to think of the generics sector as a kind of monoculture. In innovative markets, there is room for lots of variation between business models. But in the copy-cat world of generics, price pressure selects harshly for businesses whose models are identical except for the detail of which commoditised, small- molecule market they would try to dominate. In my conversations and research interviews with executives in this part of our market, the (singular) generic business model used to be taken as fact. But that sort of fact doesn’t make sense to an evolutionary scientist. It implies that there is only one competitive niche in this habitat or, to put it another way, there are no risk/return trade-offs to make. To a Darwinian, that seems an unlikely prediction and, sure enough, we’re seeing emerging evidence that the generic business model is speciating by making two related risk-return trade-offs.

The first, and most obvious, is the evolutionary choice of copying innovative products, which is hard to do but offers big rewards, or copying old products, which is easier but less lucrative. The latter is what we see when companies like Mylan or Teva copy good but aged small molecules. The former is evidenced, most recently, by the biosimilars piling in the moment Humira loses protection.

The second, more subtle, evolutionary choice is whether or not to differentiate in some intangible, non-clinical way. Even in generics, and especially in light of recent quality scandals, there is a premium payable for trustworthy brands that promise quality and continuity of supply. By contrast, there is also a market among those for whom price is all that matters. Branded generics, such as Sandoz, aim at the first market. A myriad of white-label manufacturers, mostly in emerging markets, aim for the second.

These two evolutionary choices lead to the sort of two-by-two matrix beloved of business school professors like me. That matrix implies four distinct species of generic business model. The ‘Fast Followers’ copy advanced products and differentiate them with brand values that suggest innovation and trust, as for example Amgen is doing with Amgevita. The ‘Trust Managers’ copy older, small molecules and differentiate them with a trusted, famous brand, as GSK does with Augmentin. The ‘Cost Leaders’ try to sell copies of older products on price alone, as we see in that cluster of rapidly consolidating, traditional generic companies. And evolution predicts a fourth model, the ‘Frugal Followers’, that is not yet fully emerged but Samsung Bioepis looks like a contender to make very low-cost biosimilars.

What all this implies is complexity. If you think there is a (singular) generics sector, you’re not thinking at all. If you think that all non-innovative companies need the same capabilities, structures and strategies, you’re thinking too simplistically. The market habitats in which patents don’t exist are harsher, and offer less niches, than innovative markets with exclusivity. But generic is not a byword for simple. Both generic companies, and the innovative companies that they challenge, should bear that evolutionary lesson in mind. The former should ask “What kind of generic are we?”, the latter should ask “What kind of generic wants to eat our lunch?”.

Professor Brian D Smith is a world-recognised authority on the evolution of the life sciences industry. He welcomes comments and questions at brian.smith@pragmedic.com

6th December 2018

From: Healthcare

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