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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.

The future of Pfizer(s)

Current headlines point to a frightening journey

The media is full of the Pfizer-Allergan deal, especially the likely break up of the post-merger company into 'innovative' and 'mature' products. But lacking in this frenzied coverage is any sort of scientific examination of the move, which is ironic for an industry that prides itself on its knowledge intensity. So here, as a counterbalance to the gossip, is an evolutionary science take on where that megadeal leads. As usual, I'll talk theory first, practical implications second.

Evolution always leads to speciation: from Darwin's Galapagos finches to the 8.7 million species that make up the 'tree of life'. Species arise when evolution makes 'choices' about the best way to survive: Eukaryote or Prokaryote? Vertebrate or Invertebrate? Viviparous or Oviparous? An accumulation of genetic variation, selection and replication leads to our wondrously varied natural world.

A Pfizer Mature/Pfizer Innovation split would be a step towards speciation. It would echo others, such as Abbot/AbbVie and Baxter/Baxalta. But it would be naïve, simplistic and product-oriented to think that is where evolution ends. In addition to the Mature/Innovative choice, there are many others that face life science companies. Government payer/patient payer, single technology/technology synthesis, small market/large market. In my research, I've identified these and many other evolutionary 'choices' that life science companies are making.

In biology, an evolutionary 'choice' is successful when it leads to greater reproduction, survival and gene replication. In business, success is measured by risk-adjusted rate of return. A business model thrives and is replicated when its choices of what to sell, to whom and how it fits with making a better risk-adjusted rate of return than its competitors. Every strategic choice has a survival implication. Mature products have lower returns but lower risk than innovative products. Big markets offer more potential but also more competition. Integrated technologies create more value than single technologies but have greater chance of failure. And so on.

It's not clear yet if they have a map or if they've merely been distracted by the siren calls of tax inversion

In practice, this means that the Mature/Innovative split is but one evolutionary choice among many. 'Mature' companies will need to choose between brand differentiation or commodity competition. For innovative companies the choice is between technology focus and integration. Other choices include how much to integrate into the customers' value chain and how much to address the patient as payer. Driven by these evolutionary choices, the life sciences sector is exploding into a complex, speciated landscape. In the book that I've just finished writing, I identify no less than 9 distinct competitive habitats, 26 different business models and a number of evolutionary 'troughs' that, if a firm stumbles into them, will lead to extinction.

And the practical implications of this? Well, imagine yourself in a landscape with 26 hills and a number of deep, dangerous valleys. The hills vary in height and in shape, with gentle, smooth ascents on some sides and scary cliff faces on others. Some are close to you, others involve a long, risky hike. To survive, you need to find and choose a hill and then climb it. Importantly, you need to find, choose and climb that hill faster than your competitors, who are pretty smart people. And it's dark. And the valleys teem with vicious wolves, the activist investors, who want to eat you up.

In this frightening scenario, you have two possible strategies. You can wander around opportunistically, changing direction every time the land seems to slope upwards and hoping to find the peak. Or you can get a map, a torch and a compass, pick your hill and plot a route that avoids the valleys. The latter choice is hard and brave. The former is easy and foolhardy.

Back to Pfizer, it's not clear yet if they have a map or if they've merely been distracted by the siren calls of tax inversion. I suspect a bit of both. If so, they'll split into not just two but many businesses, from cosmeceuticals to orphan drugs to blockbusters, as they try to climb several hills at once. And they will offload other businesses, choosing not to climb some hills. This will work as long as they do it quickly, effectively and they convince investors that they are good at running a varied risk/return portfolio. I'm not so sure about some other companies. In the feeding frenzy of M&A, I see companies running up any hill they see, not realising that there are easier, bigger hills nearby. And I see others wandering happily down into deadly valleys where investors lie in wait to dismember them. Evolution is cruel.

All firms will have to make this journey across the new, emerging life sciences landscape. If your guide is unscientific industry gossip, it is a perilous adventure with a low chance of survival. With a good map, torch and compass, it's merely frightening.

18th February 2016

From: Sales



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