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Fierce creatures

Investigating the new business models set to evolve and dominate the pharma market of the future
Tiger

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

Other articles in the series:
1 - Evolutionary theory
3 - Survival instincts


Changes in the social and technological environments are radically reshaping pharma's competitive landscape, driving the extinction of current business models and the evolution of new ones. But what will those new business models look like? This second in a series of three articles looks at the new creatures that will emerge to populate the pharma market of the future.

The first article of this series, 'Evolutionary theory', described how powerful, once-in-a-century changes in the social and technological environment will reshape the familiar pharmaceutical market. The market will fragment into a number of diverse habitats defined by who pays (rich individuals, payers or mass-consumers) and how value is created (by technological innovation, hyper-efficiency or trust). In all, the research suggests there will be 14 new and different market habitats, each of which will demand a different set of capabilities and all of which will be unlike today's pharma market.

This fragmented market will drive the shape and structure of the industry as business models evolve to fit the new market environment. The existing business models of big pharma, speciality and generics, are not well adapted to these new habitats. Today's firms will therefore adapt or die and the net result will be a sector populated by about seven new, distinct and largely non-competing business models. Each of these new species of pharmaceutical company will carry traces of DNA from today's firms but will be as different from them as a chicken is from its distant ancestor, the Tyrannosaurus Rex.

The species closest to today's big and speciality pharma will be the 'Genii'. Those taking this form will push technological capabilities to new extremes, combining pharmacological, materials and information technology to provide therapies of science-fiction-like power. However, they will be small by today's standards, dominating only the limited habitats where wealthy individuals pay for themselves or governments are forced to pay for politically sensitive patients. The Genii firms' huge profit margins will reflect the risky nature of their business model and their survival will depend on radical innovation. As a result of the small habitat and high risk, many of today's firms who aspire to be tomorrow's Genii will fail to win a place in this market space.

The next most familiar model will be the 'Monster Imitator' firm. Superficially similar to today's generic companies, these will make their ancestors look small, inefficient and costly. For these firms, survival will depend on fast following, massive scale and ruthless efficiency. As a result, only a handful of the global firms will dominate this off-patent market habitat and small firms will have little chance here. States and other payers will buy most of their drugs from these firms but at tiny margins in a tender-based market that will be much more commoditised than any part of today's market.

While the Genii and the Monster Imitator will trace their DNA back to today's firms, the five remaining models will evolve from cross-breeding pharmacological and customer-management capabilities. The health-concierge model will, for example, resemble a cross between today's private wealth-management companies and a pharmaceutical company. Focusing closely on the wealthy, it will offer health maintenance as well as therapy. For the less wealthy, states and other payers will pay some firms, the 'Lifestyle Managers', to prevent disease and, when this fails, pay other firms to manage the chronically ill, a new form of 'Disease Manager', very different from its 1980s version.

In addition, lots of firms will evolve to extract new value from old therapies by reformulation or redesign. These 'Value Pickers' will be the carrion of industry and, in pharma markets as well as in biology, this will be a very successful approach. For those populations that payers cannot or will not pay for, a new model will arise that will have traces of DNA from retailing, pharma, OTC, nutraceuticals and the fitness industry. These firms, the 'Trust Managers', will supply branded generics and prophylactic products along with services. Their distinctive characteristic will be their ability to build and maintain the trust of the patient who will be their customer.

From the perspective of today's industry, it would be easy to mistake these new models as either simple extensions of current ones or beasts that are not really pharma companies. However, this would be naive. These business models, superbly adapted to the new conditions of the market, will win the revenue streams that today's pharma companies see as theirs. Just as a 19th century apothecary would not see today's retailers or today's big pharma companies as true apothecaries, their superficial similarity, or lack of it, to what is currently called a pharma company, is actually quite irrelevant.

There are two other characteristics of these future pharma species that will be quite different from today's firms. The first is their differentiating capabilities, which will be much more polarised than at present. The innovative capabilities of the Genii will be so much greater than the other pharma firms as to be incomparable. Similarly, the low-cost efficiency of the Monster Imitators will mean their pricing will not be comparable to other pharma firms that seek to add value in some way. In addition, the different customer-management capabilities of the other models will each be so distinctive and specifically adapted to their habitat that they will co-exist in adjacent but different market niches.

The second characteristic of future pharma firms that will surprise an observer used to today's companies will be their structure. The outsourcing seen today will go to extremes and business units will become smaller, more specialised but more networked. If the biological analogy of today's firms is a higher mammal, with its multiple interrelated physiological systems and processes, then tomorrow's pharma company will be more like a lichen. This symbiote of simple, separate but inextricably connected organisms is a good analogy for how the outsourced, disintegrated pharma company structure of the future will look.

The maxim of evolutionary biologists is worth remembering here. Evolution is not direct and it does not have a goal. If the changes in technological environment allow value to be created in new ways and parallel shifts in the social environment change who defines value, then the habitat for pharmaceutical companies will change and fragment. As they struggle to survive, individual firms will adapt their structure and capabilities. Successful variations will be selected for and copied, while maladaptations will die off. Eventually and inevitably, the environment will shape the industry's business models, by favouring some and making others extinct.

This has fundamental implications for the leaders of firms who work in the sector now. In essence, they have three decisions to make. First, they must decide in which of the future market habitats they should attempt to operate. Second, they should decide what capabilities and structures they will need to develop in order to adapt to that habitat. Finally, they will need to ascertain how they can adapt faster and more effectively than their competitors.

Those three questions will form the basis for the third and final article in this series.


About this article
This series of articles has been drawn from research conducted by Brian D Smith, which is contained 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 'PME2' when purchasing the book via the online bookstore: www.pragmedic.com/bookstore

Other articles in the series
1 - Evolutionary theory
3 - Survival instincts


Dr Brian D SmithThe Author
Dr 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.

 

To comment on this article, email pme@pmlive.com

 

The Future of Pharma 

14th July 2011

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