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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.

Creative destruction

Biotech’s problems create opportunities for others

Big Bang

A major part of my job is to watch a stream of industry announcements cross my screen, read them and see if some kind of signal emerges from the noise. Sometimes, I see things that point to new ideas about the evolution of the industry. At other times, I see something that reinforces and supports my previous findings.

Recently, a statement from Roche resonated strongly with my study of the pharmaceutical innovation ecosystem. It’s a good illustration of how Darwinian mechanisms act in our market, so stick with me for a few minutes and I’ll explain both the concepts and the practical takeaway.

Schumpeter’s gale
One of the most fascinating characters in economic history is Joseph Schumpeter. I say fascinating because he claimed to have set himself three goals in life: to be the greatest economist in the world, to be the best horseman in Austria and to be the greatest lover in Vienna. He confessed to reaching two of these goals but he never admitted to which. Schumpeter is credited with the concept of creative destruction – the idea that the demise of old ways of doing things leads to the emergence of new ways. However, although he is most associated with the term, it really has its roots in the economics of Karl Marx, as Schumpeter makes clear. Now, I’m not a student of Marx but I came across his thinking because his contemporary and my hero, Charles Darwin, described similar ideas of creative destruction in a biological, rather than economic context. For example, in his most famous book, on the Origin of Species, Darwin wrote that ‘the extinction of old forms is the almost inevitable consequence of the production of new forms’.

So, although they never used the term, creative destruction seems to have been a voguish idea in the mid-19th century. But it took another century before Schumpeter coined the phrase ‘the gale of creative destruction’, and it wasn’t until after his death that it became one of the most famous phrases in economic theory.

Roche’s opportunity
So what has Schumpeter’s gale to do with my research into the evolution of the pharmaceutical industry? Well, pharmaceutical innovation today relies heavily on external innovation and partnering between big pharma and small, start- up biotechs. And, as I’ve written about extensively elsewhere, the pharma-biotech relationship is complex and delicate. Each side often complains about the unrealistic expectations of the other and that this tension hinders the translation of discovery into innovation. My work suggests that if something were to change, so that those misaligned expectations could be better aligned, it might help pharmaceutical innovation. So, I was fascinated when a spokesperson for Roche, speaking about the company’s future and the productivity of its R&D investments, touched on this very subject. Describing the existential challenges facing many biotechs at the moment, the spokesperson implied that this might create opportunities for Roche to partner or acquire, so enhancing its rate of innovation. And that isn’t the only place I’ve heard this thought expressed – it’s a talking point. This is a clear example of a gale of creative destruction, where negative change in one area creates positive opportunity in another. Roche and other companies are very good at seeing which way this wind is blowing.

Mammal’s luck
In biology, the most famous example of creative destruction is the story of the dinosaurs and the mammals. Your ancestors, warm-blooded, milk-secreting vertebrates about the size of a small mouse, played a minor role in Earth’s biological story. Until, that is, something palaeontologists call KT boundary, which was about 65 million years ago. At around that time, a mass extinction event, which has been associated with a large meteorite impact, destroyed many species including, most famously, most kinds of dinosaurs. It was only after this event that mammals took their chance to spread all over the world and to become the most varied and successful vertebrates on Earth. What they did, of course, was to take advantage of the destruction of the dinosaurs and other species and to fill the ecological gaps left by those extinguished types. So what was a destructive gale for most species was a very constructive one for our ancestors.

Riding the wind
The parallels are there for pharmaceutical business leaders to draw, even if they are indirect. The take away from this, as the spokesperson from Roche was pointing out, is that strategists in life sciences companies should be sensitive to the opportunities caused by gales of creative destruction. This includes those gales we’re seeing that are buffeting the biotechs, but there are other gales elsewhere in the life sciences ecosystem. The demand for value, the retreat of governments from some areas of healthcare and the demise of the middle classes in western economies are all changes that both destroy old ways of doing things and create new ways. Roche’s strategists are wise to this and you should be too.

Professor Brian D Smith works at SDA Bocconi and Hertfordshire Universities. You can listen to this column on his Darwin’s Medicine podcast and on his YouTube channel. He welcomes comments at brian.smith@pragmedic.com

Professor Brian D Smith works at SDA Bocconi and Hertfordshire Universities. You can listen to this column on his Darwin’s Medicine podcast and on his YouTube channel. He welcomes comments at brian.smith@pragmedic.com

15th December 2022

From: Healthcare

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