The global pharmaceutical industry has made a major contribution to society but faces an uncertain future as many of its blockbuster medicines fall over the patent cliff and the economics of healthcare becomes an ever-hotter political potato. Dr Brian Smith believes the industry needs to change to reacts to this challenge.

Evolutionary economics not only accounts for the history of the pharmaceutical industry but also by bringing together all of the changes happening now, it can be used to predict the industry’s future. The pharmaceutical industry is not simply evolving, it is co-evolving with both its scientific and sociological environments to create a new ‘fitness landscape’, or a set of habitats that will dictate the emergence of new business models and the extinction of old ones.

Changes to the perception of value of healthcare from clinical outcomes to the best health-economic outcome will drive changes in the customer landscape with three key groups of customers emerging:

  • The rich will use their wealth to prolong and enhance their lives
  • Organisational payers, such as governments and insurers, will only provide core services
  • Mass consumers will sacrifice consumer goods to co-pay and self-medicate

There will also be changes to how that value is created within the industry itself. Three fields will emerge companies that technologically innovative, those that are hyper-efficient or those that generate customer trust. As a result, the market will fragment into a number of diverse habitats each of which will demand a different set of capabilities and all of which will be unlike today’s pharmaceutical market. This fragmented market will drive the shape and structure of the industry as business models evolve to fit the new market environment. The existing business models of big pharma, speciality and generics, are not well adapted to these new habitats. Today’s firms will therefore adapt or die and the net result will be a sector populated by about seven new, distinct and largely non-competing business models.

Two of these will be easily identifiable ancestors of today’s industry. The Genii – the closest to today’s big pharma – will be smaller in size than today and will push technological capabilities to new extremes, combining pharmacological, materials and information technology to provide therapies of science-fiction-like power. The Monster Imitator – similar to today’s generic companies, however they will make their ancestors look small, inefficient and costly. These two groups will be much more polarised than at present. The innovative capabilities of the Genii will be so much greater than the other pharmaceutical firms as to be incomparable, while the low-cost efficiency of the Monster Imitators will mean their pricing will not be comparable to other pharmaceutical firms that seek to add value in some way. The other business models will be focussed on customer management capabilities and each will be so distinctive that they will co-exist in adjacent but different market niches.

These future pharmaceutical firms will also be structured differently from today’s companies. They will have smaller, more specialised but more networked business units and outsource to extremes.

To survive in this new future, the leaders of firms who work in the sector now will have three decisions to make: which market to operate in, what capabilities and structures they will need to develop in order to adapt to that market and how they can adapt faster and more effectively than their competitors.

Dr Brian Smith, Adjunct Professor at SDA Bocconi in Milan and Visiting research fellow at the Open University, will expand on this hypothesis and suggest how modern companies might adapt, evolve and survive in future at the BIA UK Bioscience Forum on 4 October and in his latest book The Future of Pharma.