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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.

Choose or lose

The divergence of business models demands brave choices

Researching the evolution of the life science industry, as I do, requires a very different methodological approach from the deductive, experimental methods I was trained to use in my earlier life as a research chemist. In essence, it involves sifting through thousands of 'industry episodes' such as launches, trial results, acquisitions and failures. The sort of things you see announced in your in-tray every morning. With luck, skill and many hours of work, consistent patterns emerge that reveal the direction - or more accurately directions - in which the industry is heading. Countless interesting discoveries come out of this work, but one of the most salient findings of my work is that business models in the life science industry are diverging and becoming more distinct. Even as I prepared this month's column, some more data came in to support this finding and illuminate its implications. As usual, allow me to give you a little peek into the science before I return to the practical implications for those who work in our industry.

A central concept in evolutionary science is fitness, the measure of how well a genotype or phenotype survives and contributes to the gene pool of the next generation. The fitness of a phenotype is a function of how well it has adapted to its particular environment. A sloth has a high fitness in the Amazonian tree canopy as does a piranha in the river below. But put the fish in the tree and the mammal in the river and the fitness is reversed. Actually, sloths can swim rather well but that would be missing the point.

Evolutionary scientists use a particular type of chart to display fitness. Invented by Sewell Wright in the 1930s, the Fitness or Adaptive Landscape is a three-dimensional plot of fitness against adaptation to two aspects of the environment. To see how biologists use them, you can do a Google search and if you want to see a fitness landscape of the life science industry, look back at my earlier writing (available from me on request).

The implication for industry leaders is clear: don't fudge. Choose a business model and become the best you can at it as fast as you can.

A quick look at any fitness landscape reveals a complex series of peaks. An adaptation that sits at the top of any of these peaks has high fitness and will probably survive. In biology, peaks represent successful species and, in the life science industry, peaks represent successful business models. In both cases, being at the top of a peak means that you contribute to the future.

But just as interesting are the fitness troughs that lie between the peaks. The species or business model adaptations that lie in these 'valleys of death' will probably become extinct. And, crucially, peaks don't blur into one another but are distinct. Evolution chooses to be a sloth or a piranha but never a 'slothanha' or a 'piranoth', which would have low fitness in any environment.

How is this relevant? Well, it implies that hybrid business models will fail and business models that represent clear choices will survive. This is illustrated by the industry episodes I was cataloguing this week, which revealed an emerging pattern that the cardiovascular market is diverging into two very different creatures. On the one hand, there is the consolidation of the generic companies with a low-tech, small molecule, huge scale, low-cost, limited effectiveness model. On the other hand, there is the innovators' high-tech, biologic, tight-focus, high-cost, extended effectiveness model. The latest trial results from Amgen point out how its model is trying to create clear space from statins. The rush to consolidate in generics is evidence of movement the other way. Both innovators, like Amgen and Sanofi, and the consolidating generics companies know that a hybrid business model with value propositions that are neither very effective nor very cheap will fail. Without evidence that they can reduce atherosclerotic plaques, Amgen and Sanofi know that PCSK9 inhibitors will struggle to get their expensive price. Without very low costs, Sandoz, Mylan and Teva know they will not win the price wars that are ravaging their sub-sector.

The implication for industry leaders is clear, not just in cardiovascular but in most other disease areas too: Don't fudge. Choose a business model and become the best you can at it as fast as you can. It seems obvious, until you look carefully at other patterns in my stream of industry episodes. These reveal that many companies are culturally indecisive. Hungry for growth, they want to be innovators and cost leaders. While some companies (Novartis/Sandoz for example) might manage this by putting up internal walls, it's difficult and demands discipline. Much easier and so more common is to try to be both at once and so follow the gentle slope into the fitness trough. As the brilliant Peter Drucker once said, behind every successful business is a brave decision. 

21st December 2016

From: Sales



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