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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.

Digital divergence

Combining digital and pharma is proving less easy than previously thought

Pharma and digital

We tend to view evolution as a one-way process that heads towards the positive.

It’s a fallacious view, of course; evolution doesn’t have an end in mind and even as it aims to achieve a greater fit with the environment, it is by no means a steady progress. Its history is full of dead ends, stumbles and falls. Recent months have provided an example of this in the way that pharma companies and digital health companies have fallen out.

It’s an important and interesting phenomenon for which evolutionary science provides not one but two explanations. As usual, let me guide you towards the practical implications, for pharma and digital, of evolutionary theory.

Failed relationships

What we’ve seen recently – for example when Otsuka and Proteus ended their collaboration – is a number of pharma companies looking at digital partners, seeing value in getting together, forming a nascent relationship and then falling out.

Interestingly, these break-ups don’t seem to be the result of changed minds – everyone still agrees there is value to be created – but rather a failure to make the relationship work.

For a management scientist like me, when two great companies can’t make a good deal work then there’s something to explain. And, as ever, Darwin’s dangerous idea does the job well. In fact, it provides two complementary explanations.

Evolutionary mismatch

The first perspective is that the relationships failed because the parties had not evolved the necessary capabilities to envision, design, develop and deliver the extended value propositions their partnerships were intended to create. This implies that the partners have not evolved the organisational routines and microfoundations that underpin the necessary capabilities.

And why should they? The life sciences market environment has not, until very recently, ‘selected for’ these equivalents of organisational genotypes and phenotypes. (New readers of this column who aren’t familiar with the ideas of organisational evolution, please feel free to ask for earlier articles that explain these concepts.)

Look at it this way: pharma is very well adapted to the recent past in which value was created from molecules, either by one pharma company alone or the co-operation of two similarly minded and structured companies. But then the environment shifted in two ways. Firstly, value became possible through a combination of molecule and information (what in my research we call the Great Information Shift).

Secondly, the means of creating that value shifted to being via the collaboration of very different sorts of firms (in my work, The Great Holobiont Shift). Just like humans evolved for an environment where sugar and fat were scarce, an evolutionary mismatch develops. Humans get fat; companies struggle to create the value they can see.

Different pressures and perspectives

A second, complementary perspective on the problem comes from an analogy with evolutionary psychology. In his wonderful book, ‘Good Reasons for Bad Feelings’, Randy Nesse recounts how risk-taking behaviour changes with the situation. In simple terms, the more we feel under pressure, the more we tolerate risk. This behaviour is seen in many species, from birds to humans.

It Is not hard to see the parallels in the case of pharma/digital tie-ups. The pharma companies involved are generally large, well established and diversified. That doesn’t make them risk-free of course but the people inside them must sense relatively little immediate threat to their survival.

By contrast, most digital firms are small, new and have all their eggs in one basket. It would be odd if their leaders didn’t have a heightened sensitivity to risk compared to their big pharma counterparts.

If so, evolutionary psychology would predict that the two different partners would exhibit different behaviours with respect to sensing, assessing and managing business risk. I have no empirical data on these cases, but it is reasonable to hypothesise that big pharma and ‘little digital’ probably look at deals through very different risk-management lenses. This must make reaching agreement harder.

Lessons in value

If pharma and digital are to become partners, then they must recover from their recent stumbles together and evolve the capabilities to co-create value. Taken together, the two perspectives described above suggest a practical approach to this. The issue will be how to jointly understand, manage and communicate business risk.

The ability to do this will lie in organisational routines, such as those for identifying sources of risk, and the microfoundations that enable those routines (again, new readers of my column can request my earlier writing on this). To make another biological analogy, we can see the phenotypic symptoms, we know the genotypic cause, we have to do some engineering.

However, it’s the routineome, not the genome, we need to work on. And we should, because the potential value – commercial and societal – of pharma/digital tie-ups is indisputable.

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

21st February 2020

From: Research

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