Pharmaceutical Market Europe • February 2021 • 30-32

MANAGEMENT SCIENCE

Back to the future

Five years ago, an influential book used Darwin’s ideas to predict the future of the industry – how did that work out?

By Brian Smith

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As Neils Bohr famously joked, predictions are difficult, especially about the future. Yet our industry is built on predictions. We predict a prognosis from a diagnosis, that an intervention will result in an outcome and that a value proposition will change market behaviour. From R&D to marketing, we’re happy to anticipate the future when our predictions are based on good science. But can we use science to predict the future of our whole industry? In 2016, I did just that in a critically acclaimed book and a series of four PME articles. Five years is a long time in the life sciences so, in 2021, it’s a good time to review my predictions.

Generalised Darwinism

My work isn’t quite as trailblazing as it might seem. For over a century, scientists have agreed that the concepts of Darwinian evolution – variation, selection, amplification – apply far beyond biology. They have provided insight into everything from language development to software design to economic systems. Generalised Darwinism, as it is known, uses close parallels between business models and species and between organisational routines and genes to help us explain and predict how industries change. This is much more than a mere analogy; Generalised Darwinism is a body of science that applies just as well to business as it does to biology. But my work was the first to apply it to pharma, medtech and related sectors. So, what did it predict and, five years on, are Darwin’s ideas as powerful in this sphere as they are elsewhere?

Six great shifts

My research first predicted that life sciences business models would adapt to the selection pressures created by shifts in our market’s sociological and technological environment. From the painstaking synthesis of thousands of individual factors emerged six great shifts in our market to which our business models would have to adapt (see Selection Pressures PME February 2016). What now seems obvious in hindsight was radical then. Changes in how value is defined (and by whom), how information is used and the impact of systems biology were among my predictions then and, together, those six shifts have clearly shaped our business models. Innovation in our sector now lies mostly at the interface of the -omics and bioinformation, and market access now foreshadows marketing. These adaptations have occurred because, just as in biology, business models that do not fit with these changes are strongly disfavoured and are outcompeted by those that do. Half a decade after I wrote that first PME article, it is still a useful way to make sense of the whirlwind of changes in our industry’s wider environment.

‘Generalised Darwinism uses close parallels between business models and species and between organisational routines and genes to help us explain and predict how industries change’

Business model speciation

Inevitably, time-poor CEOs who had read my work asked me to summarise the future of their own businesses. I told them it would be speciation. Evolutionary forces like the six great shifts don’t change one entity into another, they cause it to divide into variants. Large organisations that contained multiple businesses, each with its own distinct sub-environment, would need to fragment into more autonomous units. Even in 2016 we could see it with Abbott/Abbvie and Sandoz/Novartis and the years since then have seen that trend amplified. Mature and innovative businesses divide and specialised businesses separate from large-scale units. From Pfizer to GSK to Merck, the trend for business models to separate, speciate and specialise is very clear. Darwin would have expected nothing else.

Focus on value

After environmental shifts and business model speciation, my third fundamental prediction was about how those business models would group into genera. Evolutionary theory implied an extreme polarisation of the three ways to create value – via either technological innovation, operational efficiency or customer intimacy – and hence the emergence of three distinct kinds of business. The ancestors of these business model genera could already be seen in, for example, Roche, Mylan and Fresenius but in each case we have seen increasing specialisation and, consequently, differentiation. Increasingly, we don’t have one industry, we have three. And just as biological species succeed by uncompromising specialisation, life sciences companies that try to straddle these three genera fail. We have seen this in the relative demise of Teva, whose leadership thought it could be both innovative and low-cost. Evolution forces choices and despises compromises.

Customer-centric, but for which customer?

As well as predicting speciation by how value is created, Generalised Darwinism also predicted speciation according to the customer for whom that value is created. Historically, our industry’s customer has been institutional – healthcare systems and the governments that fund them. But as the healthcare possibilities outstrip the ability of governments to fund them, evolution predicts a habitat in which the patient pays even for advanced, expensive treatments. And this has come to pass. Whether as co-pays, health-tourism or crowd-funding, we’re seeing the emergence of a market in which the patient, or his or her family, influences the choice of drugs or devices. At the extremes, we see this in Human Longevity Inc, whose model is unlikely ever to appeal to governments or insurers. Together with the above-mentioned specialisation by how to create value, specialisation by who to create value for has created a market environment of nine habitats, each driving the evolution of different kinds of business models in the same way that desert, jungle and tundra lead to the emergence of habitat-specific species. Equally, every failed market access submission is evidence of a business model that has tried to straddle habitats and failed (see Figure 1). In another parallel with biological species, business models reflect the habitat in which they live.

‘Mature and innovative businesses divide and specialised businesses separate from large-scale units – from Pfizer to GSK to Merck, the trend for business models to separate, speciate and specialise is very clear’

Darwin’s tangled bank

As I drilled deeper into the complexity of our industry, I could see that even nine business models weren’t enough to fully describe reality. Even within each habitat, business models were specialising within specialisation. Technological innovators were choosing to focus on one area of science or to become science integrators – for instance, with drugs and companion diagnostics. Business models that aimed to compete on customer intimacy were polarising between small audiences – so called health concierges – and mass markets, which is Fitbit’s emerging model. Those models that aim to imitate innovators were diverging between those who followed close behind – such as biosimilars – and those who chose to focus on old science – the unbranded generics, for example. To anyone who has read Darwin’s ‘Origin of Species’, the parallels between this complexity and his description of the tangled bank of an English hedgerow are obvious. If it is possible to improve survivability by specialising, nature will find a way to do so. Equally, if ROI can be improved by speciation, new life sciences business models will emerge.

The result is the complexity we see in our market today and is reflected in Figure 1, which identifies no less than 26 distinct business models. You can read more about this in my June 2016 PME article, Explosive Evolution.

QED

Although built on years of research, the conclusions of my research could only be putative. Evolutionary science isn’t like Newtonian physics, in which the future can be perfectly extrapolated from the past. Nor is it resolvable into simple laws like the physical sciences. It took me 120,000 words to explain my findings in my 2017 book ‘Darwin’s Medicine’. The only way to test my Darwinian predictions was to sit back and watch, which is what I’ve done since 2016 and you may have read in my regular PME column named after the book.

By and large, I feel pretty vindicated. The six great shifts I saw emerging in 2016 have each grown into market-shaping fundamentals. The market polarisation into nine habitats has become clear and it is increasingly true to think of the industry as a family of industries. Within each of these families, business model speciation is evident as they struggle to create value in a changing market environment. Scientists, however, are always interested in the null hypothesis. It is interesting that, for example, firms and their customers have struggled to adopt value-based pricing. Equally, large firms have been slow to adapt both to new technologies and changing customer needs and have resorted to acquisition over organic evolution.

Both of these phenomena are examples of how evolution is slowed when it involves co-evolution between different species. These peculiarities continue to drive my research without calling into doubt the previous findings of my work.

‘That some firms absorb new ideas better than others is a fact as established as any in management science – it is a major explanation of why some firms last and others don’t’

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Marx’s dictum

‘Darwin’s Medicine’ was an attempt to explain the world of the life sciences industry. But I’m reminded of the words carved on Karl Marx’s tomb: ‘The philosophers have only interpreted the world. The point, however, is to change it.’ Here, I think my research has had a more mixed result.

I’ve worked with many companies to apply the findings of ‘Darwin’s Medicine’ to the practicalities of their business challenges. The common thread in this work has been that firms can accelerate and direct their own evolution by the equivalent of genetic engineering. By selectively removing, adding and changing organisational routines – those little internal processes that make things happen in a company – they can adapt themselves to the changes in the market that would, without adaptation, lead to their extinction.

With some companies, this concept of ‘engineering the Routineome’ has been seized on with enthusiasm and executed with alacrity. I have been thrilled to see how my theory has been applied in practice to achieve both commercial ends and, necessarily, patient benefits.

With other companies, however, I have led the proverbial horse to the Darwinian water but I have not been able to make them drink. Sometimes, firms who see the life sciences as central to their success see management sciences as irrelevant to their future. This failure to adapt can’t be explained by the individual intelligence of their leaders. I have not yet met a CEO who isn’t very clever. But I think it can be explained by something that might be described as their organisational absorptive capacity. That some firms absorb new ideas better than others is a fact as established as any in management science. It is a major explanation of why some firms last and others don’t. Ultimately, this difference between firms and its consequence was, like much else, foreseen by Darwin himself. As he was paraphrased by Leon Megginson, it is those who are most responsive to change that survive.

A set of all four of the 2016 PME articles describing this work is available from the author at brian.smith@pragmedic.com


Professor Brian D Smith researches the evolution of the life sciences industry at both the University of Hertfordshire, UK and Bocconi University, Italy