It’s not the end of the world, is it?
Industry change isn’t always gradual – it can be apocalyptic
In the Christian tradition, four horsemen symbolising Conquest, War, Famine and Death bring apocalypse to the world. Strategic planners in pharma rarely consider the possibility of a business apocalypse and, to a degree, they are correct not to do so.
Changes in the business environment that would be truly apocalyptic are what Nassim Nicholas Taleb called “black swan events”; low-probability, hard-to-predict occurrences beyond our normal expectations. But some ‘black swans’ also fall into the category of HILF – high-impact, low-frequency events that would, if they occurred, render current business models non-viable and extinct, so it would be useful to at least anticipate what those events might be.
In my work researching the evolution of the life sciences industry, these apocalyptic threats emerge from an analytical technique called ‘emergent properties analysis’. They result from the convergence of trends that we all see but rarely connect. In this article, I talk about four of them, the industry’s equivalent of the Book of Revelations’ Four Horsemen.
True and transparent value
The phrase ‘value-based healthcare’ entered the industry’s lexicon some years ago and there isn’t a pharmaceutical or medical technology company in existence that does not claim to offer value, cost-effectiveness or some other paraphrasing of the value-based mantra. And yet we know that much of what we, as an industry, offer does not provide all our customers with the best ‘bang for their bucks’. Whether we market branded products that offer no real superiority over generics, biosimilars or me-toos or we sell innovative products whose price differential is not financially justified, much of what our industry (and indeed, any industry) offers is not the best possible value for money when considered from a strictly full-cost for full-benefit perspective of the customer. This illogical situation exists in large part because payers have neither the data nor the methodologies to assess value perfectly. As anyone who works in value assessment will tell you, it’s a complicated, imprecise art.
But what if this wasn’t the case? What if we entered a world of ‘deep value’ to, adapt Eric Topol’s phrase, in which we have all the cost and outcomes data we need and the analytics to use it. What if we entered a world in which we knew, to adapt Oscar Wilde this time, the price of everything and the value of everything? It is not an exaggeration to predict that this would transform the industry. The vast range of options in each therapy would reduce to only a few, each one representing the optimum value for a given situation. Providers’ procurement practices would become much more focused and the industry’s profit pool – the total profit made by the entire industry – would shrink drastically. This would lead to mass exit, consolidation and an industry that looks more like the oil and gas industry does today, dominated by a few powerful majors and driven by costs. It would not be the industry we know today, which would have died.
The end of US pricing exceptionalism
As anyone who works globally across the industry will attest, the US pharmaceutical market, and its healthcare market more generally, is exceptional in many ways. Foremost among these exceptionalisms is its pricing; the US is the only major market that does not regulate the price of medicines. As a result, not only do American patients pay much more than their European cousins for identical drugs, very expensive drugs that offer no benefit over their much cheaper rivals reach the US market when they would, de facto, be barred from other developed and price-controlled markets. This exceptional situation has many causes, both proximate and ultimate, ranging from lobbying and political funding to the US political and social culture, which is rooted in its history.
But what if this US exceptionalism in pharmaceutical pricing were to come to an end? What if the US market became price-regulated and fully adopted European-style procurement practices such as reference pricing? As with transparent and accurate value assessment, this would have a very large impact on pricing and profitability of medicines in the US. But
if it happened in the US alone, it would have consequences different from a global reduction in pricing. It would have a disproportionate effect, for example, on companies who depend heavily on the US market. In effect, this would favour smaller and medium-sized companies with a non-US focus and reduce the relative dominance of global companies. This rebalancing of power would make the market more geographically balanced, with each country’s significance being more closely correlated to its population and GDP.
We would see an industry structured more like the global automobile market, with world- class companies more evenly spread around the globe. This would have secondary but important implications for the flow of talent, labour and knowledge. The industry as we know it would face a famine of US-based profits.
The state becomes realistic
Most of the money that flows into pharmaceutical and medical technology companies comes, either directly or indirectly, from the taxpayer. Even markets with dominant private healthcare systems, such as the US, or who force patients to have private healthcare and to co-pay, structure their tax and benefit systems to enable their citizens to pay for their own healthcare. The premise underlying such systems is that healthcare is a basic right in rich, developed economies. As emerging markets become richer, access to at least basic healthcare is one of the first developed market characteristics that their citizens seek to imitate. This global pattern has its origins in the belief that a rich country can afford to provide its populace with all the benefits of medical science and technology.
But what if that premise were to prove unsustainable? What if governments and insurers around the world told their citizens that they would, in future, be unable to keep up with the ever-advancing possibilities of medical science and would therefore only be able to enable access to some and not all of what is scientifically and technologically possible? If this happened, the dominance of the state and insurers would decline relative to the patient-payer. With the state concentrating on providing the basics, the market for premium and innovative products that provided enhanced benefits but at higher costs would shift to the consumer market, enabled by medical advisers who become more like brokers than prescribers.
This newly significant consumer market would demand very different competitive capabilities from those of traditional pharmaceutical companies. And since capabilities are difficult and costly to develop from scratch, partnerships would arise as pharmaceutical companies sought channels to reach the newly important patient- payer. We might see an industry much more like OTC, where specialised channels hold much of the power and pharmaceutical companies have to fight for brand recognition and ‘ownership’ of the customer. The industry we know today would be transformed by its war with the government treasury.
The decline of drugs
For all its multi-disciplinary nature, the pharmaceutical industry has its origins in chemistry. Its dominant paradigm is that most diseases and medical conditions can be understood in terms of molecules and how they interact within the giant, incredibly complicated chemistry set we call the human body. And the pharmaceutical industry has been hugely successful in having its chemistry-based paradigm accepted and promoted by the medical profession. Most medical interventions involve popping a pill or, more recently, injecting or otherwise taking a molecule into the patient’s body. We can rightly celebrate this shared paradigm: it has been responsible for improving, saving and extending billions of human lives. But it has not been a total success. Many conditions remain only managed, not cured, and the healthcare system’s reliance on costly treatment, rather than cheaper prevention, is a by-product of this chemistry-rooted approach.
But what if the molecular approach, with its origins in the chemistry of the late 19th century Second Industrial Revolution, was to give way to a new approach emanating from the information and other technologies of the 21st century
Fourth Industrial Revolution? What if artificial intelligence, systems biology, novel materials, big data and a connected world converged to make ingesting molecules as archaic as leeches and trepanning? Even if new, non-pharmaceutical technologies only partly replaced our current therapeutic approaches, this would represent a disruptive change for the industry. Prevention and health maintenance, warned against by personal AI health coaches, could force an epidemiological shift away from lifestyle diseases.
Many pharmaceutical treatments might be replaced by electrical stimulation, talking therapies or implantable devices. If this happened, it would make it hard for traditional companies to compete because of their fixed and outdated capabilities, cultures and world views. As with digital photography, the rigidity of incumbent companies would create openings for new entrants, in this case probably from technology companies, food companies or service providers. We might see an industry that is much more fragmented than today’s, such as we now see in the entertainment industry. The industry we now call pharmaceuticals would have been conquered by its substitutes.
Swans and horsemen
It’s easy of course to dismiss the sort of ‘black swan’ events discussed here. There are very good social, political, economic and technological reasons that every one of the examples that emerges from my work is unlikely to happen.
But I’ve chosen my terminology and metaphors carefully. Black swans were an impossibility until, in 1697, the explorer Willem de Valmingh saw them in Western Australia. HILF events are low frequency but they are high impact. And the Four Horsemen is a biblical story but they represent real things – death, famine, war and conquest – of which our ancestors were right to be terrified. The same goes for the unlikely but not impossible events that threaten our industry. All four apocalypses are possible, would have a high impact and should be feared.