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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.

2018 by Darwin

Our industry’s evolution can’t be predicted, but it can be foreseen

Figure 1

Ask any evolutionary scientist to predict the future and you’ll be met with an uncomfortable grimace. Whether they apply Darwin’s brilliant ideas to biology or to business, as my colleagues and I do, they will point out a very fundamental reason why their science doesn’t allow them the luxury of predicting the future in the same way as a physicist or an engineer might.

The problem is that evolution deals with complex adaptive systems, in which the constituent parts change each other as they interact. An engineer, even one working on the most complicated of machines, doesn’t have to worry about his components adapting to each other. The evolutionary scientist’s grimace, however, might well be followed with a qualification. While we can’t predict, in the forecasting sense, we can foresee, to a limited extent, where the variation, selection and replication that lies at the heart of Darwin’s model will lead us. In other words, if we know enough about the selection pressures in a system, we can have a good idea of what will emerge in the near future. So, despite the cautious caveats, by applying that thinking to 2018 we can identify some emergent trends that anyone working in our industry ought to be aware of.

To begin with, 2018 will bring more fragmentation of once monolithic companies into increasingly differentiated business units with their own distinctive business model. This is not a new trend. Abbott to Abbott/AbbVie is high profile example but so is spinning off specialised businesses such as Novartis Oncology. This happens because the ‘organisational genome’, or to be technically specific, the organisational routineome, needed to run a mature brands business is different from that needed to run a novel therapies business. And, to a large degree, the two routineomes are incompatible. Selection pressures therefore typically favour both routineomes but the market environment selects strongly against a business model that tries to be both things at the same time. The biological analogy is that of the rainforest fauna, which includes sloths and piranhas but nothing that is a hybrid of the two. Life science companies that try to combine multiple business models inside the same structure will struggle, as Teva’s recent problems illustrate all too vividly.

But evolutionary science doesn’t anticipate an easy future for firms that focus on their innovative businesses either. Only a minority of such new product launches fulfil the promises made to their risk-exposed investors. There are many reasons for this but a common one is that would-be innovative business models often fall into the market access trough. This is an area between those models that create value through innovation and those that create value through low relative cost. As failed launches slow uptake and HTA rejections show us, a business model that has most of the costs of innovation but delivers few of its benefits is usually selected against by our harsh, payer-driven environment.

But the market access trough is only one of many ‘fitness troughs’ in our industry’s landscape. There are also troughs that separate lower-cost models. When we think about these, we can foresee the emergence of a division between ‘fast-followers’, such as the best biosimilar companies, that mimic leading technology quickly and the ultra-low-cost generics giants, emerging from industry consolidation, that trail far behind the edge of innovation. The corollary of this speciation within generics is that those companies that try to do both at once will be selected against unless they split themselves up like the innovator companies. A similar division process can be foreseen between those generics companies that focus on branding and those that focus on low costs. Taken together, the once uniform generics sector will become a cluster of innovator-following models.

As the accompanying diagram suggests, the speciation of our industry’s business models will be the underlying trend to continue emerging in 2018. But we can also foresee other industry trends that will complement this fragmentation. The most interesting of these are those that are most different from the traditional invent-and-sell model (the ‘file it and flog it’ model in Hedley Rees’s memorable phrase) of our industry.

One less emerged property of our industry’s system that will become more important will be the unstoppable rise of the patient payer. We already see patients and their carers strongly influencing product choice in many pharma and medtech markets. This tendency will increase as more government payers are forced to restrict treatments that offer marginal but expensive benefits. We see this already in the very wealthy, who don’t even use insurance companies. But we can and should expect to see this emerge in the top 10% and not just the 1% of wealth distribution. This decile controls the majority of the world’s disposable income and will come, in time, to be an important market for our industry. This will create selection pressures: business models that remain focused on traditional payers will be selected against, while those that learn to understand and sell to wealthy patients - who can now be found all over the world - will be favoured. If you are trying to make sense of what Craig Venter is doing these days, just think about how much he cares about market access issues. Not much.

Another fascinating emergence in 2018 will be those models that finally succeed in creating value beyond the product, usually by a combination of process innovation and information technology. As in other parts of the landscape, most firms will fall into fitness troughs. They will create services that add cost and complexity without creating compensating benefits in the eyes of their customers. Business models that destroy customer-perceived value in this way will be disfavoured, at least in the narrowly cost-focused government payer habitat.

More successful, and slower to emerge, will be those business models that use technology-enabled service to create value. We see these emerging in two places. From early experiments in ‘telemedicine’, we see the evolution of integrated patient services that manage information to substantially improve the treatment and lower the cost of managing patient populations, especially in chronic diseases. Smart inhalers and continuous blood sugar monitoring are only the start of this evolutionary step. The second area where value beyond the product is emerging is when the payer is a healthy consumer. Here, we can foresee the emergence of health self-management as wearables enable big data, big data enables prophylaxis and prophylaxis displaces treatment. Soon, Apple will tell us what to eat and what medicine to take, just as Spotify tells me what I might like to listen to.

Complementing this emergence of successful new models and the falling of others into fitness troughs will be the emergence of new industry leaders with no industry background, as we see at Nestlé Health Science and other companies. This is a way of transplanting routines, à la gene therapy, into companies and it is as promising and as dangerous as that analogy implies. Our market environment will select for those companies that manage to get new ideas and industry wisdom to work together. It will punish, with extinction, those firms that either reject their implants or allow them to overpower routines, such as compliance, that are essential in our industry. That’s what we learned from Theranos.

Darwin, Dawkins and many of my other scientific heroes have been circumspect about the predictive power of evolutionary theory, and rightly so. Complex adaptive systems are very different from even the most complicated machine and predicting evolution is a fool’s game. But speciating business models, fitness troughs, added value services and new entrants are not really predictions for our industry. They are better described as observations made before they become commonplace. To quote William Gibson, the future is already here. It’s just not evenly distributed.

17th January 2018

From: Sales



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