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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.

The secret of success

It is becoming clear that success in pharma is associated with specialisation

It is that time of year when life science companies report their results and, therefore, the season for academics like me to search for patterns in their stories of success and failure. Even when one has stripped away the investor relations spin, this is not an easy task. There are many factors that mask the real trends, such as the general state of the world economy. And the data contains lots of noise, such as the reality that the results reported by large companies actually consist not of one but of several business models. And then of course there are extraneous factors, such as AbbVie’s recent gob-smacking profit prediction based largely on changes in US tax law. But looking carefully beyond all of those factors, a story emerges. As usual, allow me to go into the evolutionary science before returning to the practical lessons that can be drawn.

Evolution leads to diversity. There are over eight million species of life on our planet and they can all trace their ancestry back to one form of life. But this level of diversity also reveals a story of specialisation. Most flora and fauna on our planet are incredibly effective at surviving in their own chosen ecological niche. And just as importantly, every life form is remarkably ineffective at surviving in any environment that is significantly different from its own. Specialisation, it seems, is the magic trick to survival in evolution. We tend not to see creatures that try to be, in the English idiom, a jack-of-all-trades. Any creature that tried to be some combination of sloth, piranha and jaguar would not survive long. Yet those three creatures thrive cheek-by-jowl in the Amazon rainforest by being well-adapted to their niche. Notably, there is one species that seems to belie the value of specialisation. We human beings seem to be able to thrive in almost any environment, from the equator to the poles. But we are the exceptions that prove the rule. The evolutionary scientists John Tooby and Ira DeVore coined the phrase ‘cognitive niche’ to describe the way that Homo sapiens uses reasoning, rather than physical characteristics, to adapt to a huge range of natural environments. Without exception, if we are to draw one lesson from nature it is that to survive and thrive, one needs to specialise.

How does this relate to the business models of life science companies and the current crop of financial results? Well, just as in the competition between species, we can see a distinct polarisation of results. For example, I have been struck by the way that Roche has climbed the league tables. Its neighbour Novartis has been similarly successful too. Merck & Co (the US company) and Celgene have impressed me too with their results. But perhaps the most striking example is that of Alcon. Only last year, it looked like a failing company that Novartis was preparing to offload. But now it looks more like a textbook example of a company turnaround.

These companies, and many others, contrast with those companies at the other end of the success spectrum. I am loathe to embarrass those companies, but Teva is one obvious example. As I say, one has to look beneath the superficial results but, when one does, a pattern of specialisation emerges. Within large companies like Novartis, we see the effective separation of business units for oncology, branded generics and opthalmics. AbbVie is itself an example of specialisation, having separated from its more mature products. Pfizer has fragmented itself. And of course Johnson & Johnson is everybody’s example of a network of independent companies in related markets.

If specialisation is the magic bullet, then what is the mechanism by which it works? My research would indicate that it can be explained by very different organisational routineomes, which are the corporate equivalent of DNA. Simply put, it needs a different routineome to succeed in, for example, oncology than it does in, say, branded generics. This will not surprise readers. Less obviously, it is very difficult for these two sets of organisational routines to coexist. To revert to my biological analogy, you can have the genes of the piranha or the genes of a sloth, but you can’t have them both in the same body. Different routineomes can of course exist under the same corporate brand but only when effectively separated by internal walls, as we see with Novartis and other large companies. When you try to manage them as one business model, they conflict with each other. This means that the competitive capabilities required, which are normally the results of expression by organisational teens, are not expressed effectively. In pharma, as in biology, specialisation works.

7th February 2018

From: Sales

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