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Evolutionary theory

Predicting an unsettled new world of extinction and new life for the pharmaceutical industry 
An ape gradually becoming a human

This is the first in a series of three articles from Brian D Smith about the future of pharmaceutical marketing.

Other articles in the series:
2 - Fierce creatures
3 - Survival instincts

It has become a truism that the global pharmaceutical industry is on the brink of huge change, squeezed between what science makes possible and economics makes practical. But what might that change be? If this industry is to continue to make its huge contribution to society, more than speculation and informed guesswork are required; this knowledge-based industry needs to apply science to understanding its own fate. This first in a series of three articles looks at the future for pharma and what that prediction implies.

The essential first step when considering the pharmaceutical industry's future is to find a scientific concept that is powerful enough to predict that future. Fortunately, evolutionary theory provides what philosopher Daniel Dennett called the 'best idea ever'. Charles Darwin's big idea is not merely a metaphor for how pharma will change, but a well-tested and practical explanation. 

First used to understand the complexity of life, evolution is now used by management scientists to explain and predict many other complex adaptive systems, including whole industries. Evolutionary economics equates business models with species and the changing natural environment with variations in the market context. With amazing clarity, it accounts for the history of the pharmaceutical industry and, by bringing together all of the changes happening now, it can be used to predict the future of pharma. 

Co-evolving
The practical application of evolutionary theory begins by understanding that the pharmaceutical industry is not simply evolving. It is co-evolving with both its scientific and sociological environments to create a new 'fitness landscape', or a set of habitats that will dictate the emergence of new business models and the extinction of old ones. Research reveals a huge number of social and technological factors that are shaping this new landscape. Most of these are familiar, but the way in which they are combining to change the world is subtle, intricate and hard to unravel. In the sociological environment, demographics, globalisation and the attitudes of governments, patients and investors are among the many factors that are re-shaping who the industry's customers are and how they define value. 

For most of the last 60 years, the customers have been governments and insurance providers, who defined value as the best clinical outcome. Now there is a dramatic shift towards value defined as the best health-economic outcome, but that is only the start of the change to come. As demand outstrips what governments can pay for, organisational payers will retreat into providing a core service. Above and below state and employer provision, individuals will purchase their own healthcare. When the new rich use their wealth to prolong and enhance their lives and mass consumers sacrifice consumer goods to co-pay and self-medicate, the pharmaceutical industry will have three customer habitats of significant importance. In each habitat, value will be defined in a different way and it will no longer be sufficient to operate one business model. 

The industry's habitat will also be fragmented by the co-evolving technological environment. The most obvious scientific trends, such as genomics and systems biology will, of course, make possible fantastic new therapies. But other, less noticed, technological trends will be just as important. The convergence of the pharmaceutical sector with materials sciences such as nanotechnology and the spread of information technology to allow constant monitoring of patients are just two examples of non-pharmacological technological change that will reshape the way healthcare value is created and delivered. 

Polarisation
Beneath these headlines will be the application of technology to how pharmaceutical companies work, allowing them to restructure and become hyper-efficient. This will lead to polarisation around three business models, reflecting how value will be created in very different ways. New science will remain a value creator for the industry, but it will also become possible to create value by tailoring healthcare to the patient and by reducing the costs of treatment to a tiny fraction of today's prices. Scientific innovation, personalisation and low-cost business models all exist today, of course, but they will evolve far beyond current ideas and, compared to current models, will have a more equal balance between prevention and cure. These new business models will have as much in common with today's firms as human beings now have with the Eozostrodon, a shrew-like ancestor dating from the Triassic period.  

The next step in understanding the evolution of the new business models is to grasp that new habitats are formed at the intersections of sociological and technological change. Customers' new ways of defining value will combine with novel ways of creating value, forming a new landscape of market habitats. Our research found that a complex landscape emerged with no fewer than 11 fitness peaks, analogous to ecological niches, and three troughs, analogous to evolutionary dead-ends. Each fitness peak is characterised by the specific demands it makes on firms trying to operate within that environment and only firms well adapted to demands will survive. Firms that fail to adapt and whose business models sit in the no-man's land between the fitness peaks will meet the same fate as the Dodo: extinction. The business models that will evolve to thrive in this new landscape will be investigated more fully in later articles in this series. 

The first implication of the new industry habitat predicted by the research is that the three major business models, generics, big pharma and speciality pharma, will have no place in the new world. They will either cease to be or, at best, contribute their genes to new business models that will survive. There may still be business models known by those names, but only in the same way as humans and their primitive ancestors are all called hominids, despite many differences.  

However, in evolution extinction is usually accompanied by the rise of new species and it is likely that there will be a number of new pharma business models appearing as firms adapt and specialise to fit the 11 new ecological niches predicted. Each of these new business models will be distinct, much as research-based and generic companies differ today. They will have different strategies, structures and capabilities and, to continue the species analogy, they will not compete directly with each other. Again, these strategies, structures and capabilities will be addressed in the later articles. 

In summary, the difficult question of what will become of the pharma industry can be addressed with evolutionary economics. It predicts that a fragmenting industry environment with multiple demanding habitats will cause an extinction and speciation event. There are both biological and industry parallels for this, one being the Cambrian Explosion, which took place hundreds of millions of years ago, and saw a huge increase in biological diversity and the other being the second industrial revolution of 1870-1914, which saw the extinction of the apothecary business model and the evolution of the pharmaceutical and OTC models. 

In the early 21st century extinction and speciation event predicted by the research, the industry's current business models will disappear and be replaced by a larger number of new ones, adapted to the newly fragmented business habitat. The next part of this series will explore how those species will look and how they will differ from their ancestors. Then, the third and final part will examine how some firms may be able to out-evolve others using the new understanding.

 

About this article
This series of articles has been drawn from research conducted by Brian D Smith, which is published this month in the book 'The Future of Pharma', published by Gower in the UK. The book is based on two years of research and interviews with 35 pharma CEOs and thought leaders and uses evolutionary science to predict how the industry will change and how firms must change with it.

PMLiVE readers can purchase copies of the book, with a personalised dedication from the author, at the substantially discounted price of £45 including postage and packaging worldwide (RRP £65), by quoting 'PME1' when purchasing the book via the online bookstore: www.pragmedic.com/bookstore

Other articles in the series:
2 - Fierce creatures
3 - Survival instincts


The Author

Dr Brian D SmithDr Brian D Smith is a world-recognised authority on strategy in the pharmaceutical and medical technology markets. He is an Adjunct Professor at SDA Bocconi in Milan and a Visiting Research Fellow at the Open University Business School in the UK. He is Editor of the Journal of Medical Marketing and author of over 200 books and papers including his latest work, 'The Future of Pharma', research from which forms the basis of this article.

 

 

 

  

 

Exclusive book offer - the Future of Pharma, £20 discount 

21st June 2011

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