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Emerging business models for pharma

The traditional hegemony of the old monolithic pharma company is beginning to give way to a new, more interconnected business structure
Emerging models

When thinking about the evolution of the pharma industry, it's easy to think in terms of struggles between incumbent dinosaurs and emerging new business models with a 'survival of the fittest' conclusion. But this is to take too simplistic a view of the complex adaptive system that is our industry. Increasingly, our research suggests a more sophisticated description for the sector's development, with important implications for leadership and strategy.

Adaption and differentiation 
To understand this new thinking, it's important to grasp one of the most fundamental features of the evolutionary process: it tends to lead to complexity. The diversification of species of birds and other creatures across the Galapagos Islands gave Darwin his insight into natural selection, but the same effect can be seen in any evolving system – adaption and differentiation leads to an increase in the number of species, each with its own specialised traits and characteristics. 

In the economic evolution of the pharma industry, this equates to an increase in the number of different business models, each with its own specific strategy, structure and capabilities. This increasing specialisation presents pharmaceutical companies with a challenge. It means that, while maintaining core capabilities, such as discovery and development and marketing to prescribers, they need to acquire new capabilities, such as health economics and market access. In some cases, these newly essential capabilities may involve acquiring totally novel skills, such as managing service-based value propositions or converging device, diagnostic and pharmaceutical technologies. And of course it is not sufficient simply to acquire these capabilities; they must be developed, embedded and implemented at a speed dictated by a market that is changing at dizzying speed. 

As will be clear to anyone who has worked in a pharma company, rapid change is not always the industry's forte. Pharma companies face limitations, both internal and external, on their rate of change, such as technical complexity, organisational culture and regulation. Analogous limitations face biological species, which are limited by, among other things, the generational span of the creature and its need to survive long enough to reproduce. And it is this shared limitation in adaptive capacity that also points to another area where the pharmaceutical industry's evolution is mimicking that of the natural world.

Natural network selection
Traditionally, biologists have thought of the unit of natural selection as being the individual organism, just as evolutionary economists think of individual companies being selected by the market environment. However, in the 1990s, the hologenome theory began to emerge as a better explanation for the evolution of some complex biological systems. 

Coral reefs were initially cited but more recently human gut flora and other symbiotic systems have been explained by this new theory. In short, it suggests that what is being selected in the process of natural selection is not an individual creature and its genome, but the entire combined system, called the holobiont, and its combined genome, the hologenome. In economic terms, the parallels are obvious. What competes in the market place is not the company, using its distinctive capabilities, but the network of cooperating companies that bring a value-proposition to market. Our research into evolving pharma business models reveals that the trend towards pharma holobiont as a structure is developing rapidly as companies form semi-permanent partnerships with other pharma companies, bioptechs, universities, non-profits and outsource specialists. The precursors to such networks are well-established ideas like joint ventures, outsourcing relationships and risk-sharing agreements, but pharma holobionts appear to evolving well beyond these relatively primitive arrangements in both scale and importance.

Means of transition
For pharma industry leaders and strategists, this gradual transition from bilateral outsourcing partnerships, such as we have seen in contract sales or contract research organisations for many years, to more fully-fledged pharma holobionts raises three important questions: Why is this happening? When might it be appropriate for my organisation? And what are the critical success factors in making such novel business structures work effectively? 

The reasons for the emergence of pharma holobionts are a combination of push and pull forces. The push comes from the commercial imperative to grow in a context of the increased difficulty to discover blockbuster products, the patent cliff and payer pressures. The pull, however, is explained by the concept of transaction cost economics, for which Oliver Williamson and Elinor Ostrom shared the 2009 Nobel Prize for Economics. Simply put, their work explains that large companies have historically done things internally because it was more efficient and effective to do so. However, as technology makes it easier to connect webs of independent companies, the economics changes and networks gain the upper hand. Taken together, these factors explain why holobionts become more competitive than the traditional, vertically integrated pharma company. Just as importantly, they explain the basic rules for crafting and operating a holobiont and the circumstances in which they may or may not be the best solution. 

Holobionts are not a panacea organisational structure for the pharmaceutical industry. They have direct and indirect costs, such as threats to intellectual property, brand image and, despite new technology, they risk some loss of control when compared to a traditional, hierarchical firm structure. For these reasons, they should not be considered an easy option. However, there are several drivers for considering a holobiont approach to structuring a pharma company.

The first is when the organisation needs to develop a new set of capabilities. This is even more the case when those new capabilities are very different from the firm's existing capabilities, for example when they involve new therapy areas, new technologies, new geographies or new ways of creating value.

The second is when the market is moving very quickly and the window of opportunity is very short. In those cases, building a holobiont may be much faster than carefully building the new capability set from scratch.

And a third, related driver for holobionts is when the new business model is very innovative and involves either high cost, high risk or a combination of both. Holobionts can, if built well, both reduce and spread business risk as well as providing a greater capital pool. And since spread of capabilities, speed of action and risk-management often go together, it is common for companies to cite a combination of all three reasons as justifications for building a holobiont.

Challenges of symbiosis
The existence of a good, well-reasoned case for a holobiont does not, however, guarantee its success. Our research involved interviewing pharma CEOs with both positive and negative experiences and from their successes and failures emerge a number of important lessons that, if assimilated and acted upon, can increase the probability of a pharma holobiont being successful.

What competes in the market place is the network of cooperating companies

The first of these concerns the selection of symbiotic partners with which to build the holobiont. While it is tempting to pick superficially attractive, successful partners, the overriding criteria should be that their capabilities both complement, not mimic, those of your own firm and meet the needs of the market you are addressing. Whether these are technological, marketing or geographical capabilities, in selecting symbiotic partners it is definitely a case that opposites do, or at least should, attract. 

The second matchmaking factor is shared interests. Firms, especially those at different stages in their life cycles, may have very different goals and strategies. Some may be bent on growth, others on consolidation. Some may be seeking to diversify their market risk, others to maintain it by retaining their focus. There are no rights and wrongs in this, but a holobiont crafted from several firms with competing interests is difficult to make work as, sooner rather than later, the stresses will begin to show. 

As technology makes it easier to connect companies, networks gain the upper hand

In addition to these two tangible compatibility factors, organisational culture seems to be subtly yet strongly influential. Cultures vary between companies, especially attitudes to things like long and short termism, risk and sharing of intellectual property. However, it is not differences between cultures that hinder the workings of a pharma holobiont. In fact, the research seems to suggest that cultural diversity helps to some degree by stimulating creativity. Instead, the stumbling block is cultural tolerance.

he ability to recognise but accept the cultural habits of one's holobiont partners seems to be the glue that holds it together. Conversely, the dominant negative influence on the working of the holobiont that emerges from our research is what might be called 'transaction thinking'. This is when partners within a relation see each others as suppliers and customers, rather than partners, and manage it in strictly quantitative, financial and excessively legal terms. This habit, clearly a hangover from earlier business models, sooner or later poisons the holobiont.  

There are, as yet, no definitive examples of pharma holobionts. However, the model is emerging gradually, which is how new species always appear. As each day's industry news announces alliances, cross-shareholdings and joint operations, many are traditional transactional arrangements, based on expediency and on short-term goals. But some of them are different in their drivers, goals and the spirit of the relationship. These are the emerging holobionts that will, we believe, dominate the pharmaceutical industry.

Article by
Professor Brian D Smith

visiting research fellow at the Open University Business School and adjunct professor at SDA Bocconi. He welcomes questions and comments at brian.smith@pragmedic.com

12th April 2013

From: Sales, Marketing

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