Back to the future – PMLiVE

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 dont 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 industrys 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, were 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.

Darwins tangled bank

As I drilled deeper into the complexity of our industry, I could see that even nine business models werent 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 Fitbits 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 Darwins 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 isnt 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 Darwins Medicine. The only way to test my Darwinian predictions was to sit back and watch, which is what Ive 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.

Marxs dictum

Darwins Medicine was an attempt to explain the world of the life sciences industry. But Im reminded of the words carved on Karl Marxs 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.

Ive worked with many companies to apply the findings of Darwins 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 cant be explained by the individual intelligence of their leaders.

I have not yet met a CEO who isnt 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 dont. 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

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Back to the future - PMLiVE