While it’s always the headlines that grab our attention, it’s the gritty detail underneath that usually holds the valuable insight. So it is with a very important piece of recent work in The Lancet.

It is a study of future and potential healthcare spend from 2015-2040 and it points to a huge growth in what the world will spend on healthcare during the period in which our children will grow up. However, this fascinating, rigorous piece of work also describes a great deal of complexity within that growth, with variations both between and within countries and regions. Now, of course, healthcare spend is not the same as spend on pharmaceuticals and other medical technology but the two are inextricably linked. And the Lancet paper nicely complements my research in that area. As usual, let me give you an overview of that research before coming back to its practical implications.

Healthcare spend is driven to increase by factors such as population growth, economic development, social expectations and technological advances. All the research points to that. But more doesn’t necessarily mean more of the same. Look, for example, at the growth of spending on IT in the last 30 years or so. We spend much more, but much of that spend is on products and services that were unimagined in the 1980s and by people we didn’t anticipate as customers. Teenagers sending selfies, for example. It’s an almost iron law of market development that as a market grows, it fragments in interesting ways. So the question is how will the life sciences market fragment?

We can answer that question by thinking of markets as being defined by two dimensions: How is value created and who decides what is valuable? Historically, the pharmaceutical market, at least in the developed world, has been defined as value creation by technological innovation, with value being defined by healthcare systems (prescribers and their related institutions). There are other parts of the market of course but this ‘innovation for prescribers’ is, even now, the dominant habitat that most life science companies focus upon.

This perspective helps us to see how our market will fragment along both dimensions. Who decides what is valuable is already fragmenting into three: government payers, affluent payer-patients and relatively poor, mass-market payer-patients. This is the inevitable consequence of governments no longer being willing or able to pay for all the healthcare that is technologically possible and socially demanded. Similarly, the mode of value creation is fragmenting into three: value creation by technological innovation remains of course but it is complemented by value creation by operational excellence (which is where generics and biosimilars are heading) and value creation by customer intimacy (which is what happens when pharma and medtech companies take over some aspects of healthcare provision). This fragmentation is driven by technology and the economics of healthcare provision, which of course go far beyond the cost of drugs and devices.

Put those two fragmentation trends together and you get a 3x3 matrix of the sort beloved by business school professors.
It contains nine distinct business contexts, each defined by a particular way of creating value and a particular group of value definers. To use a biological analogy, we can compare these nine business contexts to biological habitats, just as the tree canopy, the river, the undergrowth and so on are all habitats within the rainforest.

That biological metaphor also helps us to understand two other important ideas. First, just as the same creature is unlikely to thrive equally well in very different habitats, each business environment requires very different business model characteristics. Second, just as each habitat can sustain  many different species, each business environment can sustain multiple business models. In my work, I have identified the emergence of no less than 26 business models (previously published in PME and available on request). Each is different and each is adapted to its habitat.

The practical implication of this growth-with-fragmentation story is good news and bad news. The upside is that the healthcare market, including pharma and medtech, will grow. The challenge lies in the fact that, in order to thrive in that larger market, you will need to adapt your business models. I’d go further than that and say that gradual, incremental adaptation is unlikely to be good enough. Despite the gradualist implications of the word ‘evolution’, the leaders of life science companies will need to engineer a spurt of adaptation to keep up with the rapidly changing environment. Thomas Huxley’s famous quip (often misattributed to Darwin) that it is those most able to adapt that survive has never, in the history of our industry, been more true.