Our attention tends to focus on what the biggest industry players are doing. We conflate size with success and pore over the strategy of firms such as Pfizer, Roche and Sanofi, assuming that we can learn from them and possibly emulate their models. This is understandable but flawed, for at least two reasons. Firstly, it assumes that such firms have a single business model to copy, when in fact they are coalitions of businesses with differing models. Secondly, it supposes that what works for them will work for us, even if we’re very different. In fact, as recent announcements in the industry reminded me, we might learn better lessons from smaller companies and the parallels with biological evolution. As ever, I’ll diverge into the theory before I return to the practical considerations.

Traditional models of how industries develop over time predict consolidation. Mostly, this is because they assume that as firms grow they achieve competitive advantages, such as economies of scale or scope. Eventually, goes this thinking, a small number of firms dominate the industry. In a 2002 paper in Harvard Business Review, for example, three Kearney consultants (Deans, Kroeger and Zeisel) claimed that after about 25 years three or four firms usually have about 70% market share. But, like many other consultants, their work was merely an observation of a sample without a strong underlying theory. In fact, the pharma industry has, after a century in its modern form, consolidated much less than that.

The top ten companies have only about 40% of the market, according to IgeaHub. As in many other cases, the traditional ways of looking at an industry don’t work well in pharma or medical technology.

Academic research differs from consultancy research in many ways but the most important is the primacy of theory. This doesn’t mean the abstract, impractical dreaming that non- academics often assume it means. When
an academic says theory, he or she means an explanation of how a phenomenon, such as industry structure, arises. In my work, the dominant theory is Darwinian evolution. Applying it to the structure of the life sciences industry challenges the traditional approach and provides a better explanation of what we see in reality.

‘The top ten pharma companies have only about 40% of the market’

Biological analogies are a good way to understand this. There are about 8.7 million eukaryotic species on earth and the planet’s total biomass, excluding bacteria, is about 550 billion tonnes of carbon. Yet the most successful animal in terms of biomass, the Antarctic Krill, makes up only about 1/1000 of a percent of the total. Even the five million species of fungi combined make up only 25% of the world’s biomass. In biology, consolidation hasn’t happened.

This is important because the pharmaceutical industry is, like the biosphere, a complex adaptive system. This means that we should expect it to behave more like the biosphere than to follow the rules of simple, traditional research. We shouldn’t expect the sort of consolidation predicted by the Kearney team and others. We should expect a much more distributed industry with market share spread over a large number of species of firm, or business models as we call them. And that’s exactly what comes out of my research.

The recent industry announcement that triggered this thought was from Almirall, the Spanish pharma company with fewer than 2,000 employees and a sub $1bn turnover. The company took a big risk when it bought Allergan’s dermatology portfolio. This is another example, after divesting itself of its respiratory portfolio and other purchases, of its development of the ‘Speciality Dominator’ business model, as I’ve discussed elsewhere in my writing. It’s the direct analogue of a species evolving to compete against bigger, stronger rivals by moving into and trying

to dominate a particular ecological niche. Think penguins or wildebeest. We see other firms attempting similar evolution, such as Grunenthal with pain management and Ferring with women’s health. It’s even more common in medical technology, as we see in orthopaedics or robotics. The idea is that by adapting very specifically to the very particular demands of a business habitat, a smaller firm can control enough market resources to thrive without directly competing with other firms. This is a form of resource partitioning, to use the biologist’s term.

There a several practical lessons we can from this evolutionary perspective. The first is to be wary of simple research by extrapolation from a sample. Always look for a robust theory (ie explanation). The second is that

our industry is unlikely to consolidate in the traditional manner. The third is that, for smaller firms, imitating large firms may be a less viable approach than imitating other small firms. After all, blue whales are far more endangered than penguins or wildebeest.