The document discusses how to think about the pharmaceutical industry using evolutionary theory and complex adaptive systems. It views the industry as co-evolving with its social and technological environment. Evolutionary theory can explain how changes to this environment have led to changes in business models over time. To prepare for the future, firms should carefully choose which emerging business models and habitats to evolve towards, and deliberately acquire the core, distinctive, and dynamic capabilities needed to adapt and survive.

1. The Future of Pharma
Evolutionary Threats and Opportunities
Professor Brian D Smith
(C) Pragmedic 2012

2. Questions to answer
• How should we think about the
pharmaceutical industry?
– What robust science can we use instead of
speculation?
• How does that theory help us?
– How does it explain the past and predict the
future?
• How should we prepare for the future?
– What are the important decisions to make?

3. HOW SHOULD WE THINK ABOUT THE
PHARMACEUTICAL INDUSTRY?
By thinking of the industry as a complex adaptive system and using the knowledge base of
evolutionary economics

4. Our industry is a CAS
• Complex adaptive systems (CAS) are systems that “Evolutionary theory is a manner of reasoning in its
have a large number of components, often called own right, quite independent of the use made of it
agents, that interact and adapt or learn. They have by biologists. They simply got there first.
properties of:
– Self similarity -J. Stanley Metcalfe.
– Rich interaction
– Non-linearity
– Openess
– Emergence
– Path dependence
– Self-organisation

5. A population of
replicators
(e.g. Genes)
Emergence of
Variation of
new species
replicators within
better fitted to
the population
the environment
The mechanism of
biological evolution
Amplification of Variation in traits
successful of the interactors
phenotypes (e.g. Organisms)
Selection of
organisms by
the environment

6. A population of
replicators
(e.g. Practices or
“organisational
routines”)
Emergence of new
business models Variation of practices
better fitted to the within the population
environment
The mechanism of
industry evolution
Variation in traits of
Amplification of
the interactors (e.g.
successful strategies,
Firms’ strategies,
structures and
structures and
capabilities
capabilities)
Selection of firms by
the environment

7. Our industry is co-evolving
Social technology
environment of
regulation, economics,
politics, healthcare
systems etc Physical technology
environment of basic
and applied physical
and natural sciences
Business models of
firms’ strategies,
structures and
capabilities

8. HOW DOES EVOLUTIONARY THEORY
HELP US UNDERSTAND OUR
INDUSTRY?
By explaining and predicting how changes to the environment lead to changes in business
models

10. Pharma circa 1870
(C) Professor Brian D Smith 2011
10

11. Pharma circa 1930

12. Pharma circa 1990

13. Forces shaping the landscape
Social forces Technological forces
• The shift to comparative value • Biology 2.0
• A bigger, more granular market • A smart, connected world
• The stratification of provision • New R&D technologies
• The ‘may contain nuts’ society • New operational technologies
• Proactive, empowered patients • New channels to market
• Demanding investors
• A shift to prophylaxis
A polarisation in how value is A polarisation in how
defined and by whom value is created

14. The second industrial revolution The early 21st century
1870-1914 2003-2030
European and US Germ theory &
expansion organic chemistry Biology 2.0 &
The shift east
nanotechnology
“Disenchantment” Steam engines,
& mass telegrams and “Death of
The ICT
healthcare telephones deference” and
revolution
A transformed the value shift
pharmaceutical A transformed
industry pharmaceutical
industry

17. New habitat New species of business model
Core state provision and limited choice The monster imitator - Adequate therapies sold extremely cheaply
Lazarus & Narcissus, pressured state and advance The genii – Fantastic, very expensive, relatively small volume
state provision therapies
Get well, stay well The trust manager –Trustworthy, non-innovative branded therapies
sold to the masses
Chronic cost containment The disease manager -Chronic conditions managed efficiently
Mass prophylaxis The lifestyle manager- Prevention and maintenance for the
masses
Wealthy well The health concierge – Wellness and treatment for the wealthy
Value pockets The value picker – Value-added reformulation of old ideas

19. HOW SHOULD WE PREPARE FOR THE
FUTURE?
By carefully choosing the direction in which our business model evolves and
deliberately acquiring the “genes” we need

20. Which
habitat(s)
Where do How to
I get these adapt What new
genes and “genes”?
from? survive?
What
structure?

21. Three kinds of “gene”
Core capabilities Distinctive capabilities Dynamic capabilities
(those needed merely to (those needed to thrive by (those needed to enable
operate in the market but creating sustainable change within the
will not create any competitive advantage) organisation)
competitive advantage)

22. Core
capabilities of
the future
Manage more
complex regulatory
and market access
systems
Maintain the trust of
a more sceptical
public and media
Understand and
manage more
heterogeneous, 3D
markets
Operate frugally
along the entire
value chain

23. Monster The Trust The Disease The Lifestyle The Health The Value
The Genii Manager
imitator Manager Manager Concierge Picker
Discovery and Market Actuarial Value Value
Patent busting Niche opening
development creation management integration aggregation
Ultra-efficient Channel Customer Mass Agile
IPR defence Service design
operations management retention customisation development
Strategic Value Aspirational
Brand Service Asymmetric
account proposition brand
management execution marketing
management development management
Customer
experience
management

24. Dynamic
capabilities of
the future
Translate data
into true
market insight
Create and
strongly
differentiated
strategies
Adapt the
organisation to
enable strategy
execution
Sustain
organisational
learning
Manage value-
creating
networks

26. Successful
Fail to adapt Environmental Environmental
adaptation to
adequately pressures pressures
environment
“Industry best Organisational
practice” loop learning loop
Absorb
Import “best Recognise
practice from Understand
practice” from proximate
any relevant fitness criteria
peers needs
source
Succumb to
Resist mimetic
mimetic
pressure
pressure