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1 The life sciences industry really is exceptional
Is the life sciences industry really different from any other? The question is important because, if it is exceptional, then we might expect leadership in pharmaceutical, medical technology and related companies to be different from that in other businesses. Conversely, if the reverse is true and the life sciences industry is really no different from others, or if it differs only in minor details, then the plethora of theories, books and articles about leadership will apply as well to this sector as they do to any other. So, the question has important, practical implications and it was the first one I asked when I sat down with my interviewees.
My question, and the supplementary questions that followed it, were designed to cut through the bias towards exceptionalism that one sees commonly amongst business people. Management researchers are familiar with and sometimes weary of executives who begin their answers with some version of the phrase, “You see, our industry is unique and not like any other”. Typically, they then go on to describe a company that faces very similar challenges and arrives at very similar solutions to most other companies. Such genuine differences as they do describe are often no more than variations on a theme, such as exactly where low-cost competition comes from or the causes and consequences of rapid technological and social change. Like any other researcher, I had expected my interviewees to start from this position of exceptionalism.
It was refreshing and pleasantly surprising that the leaders of life science companies I interviewed almost always began with an opposite, unexceptional approach. At a fundamental level, they told me, they face the same challenges of understanding and addressing customer needs as their colleagues operating in other markets. Equally, their solutions could be resolved down to choices about how to focus scarce resources to optimise risk-adjusted return on investment. From that very high-level perspective, their job was not different from that of any other CEO.
However, once past these elementary parallels, they began to describe ways in which their situation and strategies were noticeably and importantly different from companies not operating in the life sciences market. The interviewees were often well placed to see these differences: some had worked in a variety of other sectors; some currently held board positions outside the life sciences industry; and all of them showed the breadth and depth of general business knowledge that you might expect to find in the C-suite. They had all considered this question before and were able to give thoughtful, substantive answers.
As is usually the case in qualitative research interviews, the answers appeared at first to be a flood of personal, individual observations, each couched in the interviewee’s own vocabulary and illustrated with case-specific examples. To use an information technology metaphor, their answers were “noisy” and the “signals” were weak. During analysis, however, this amorphous mass of data crystallised into four distinct but related factors, four ways in which the life sciences industry can be said to differ significantly from other industries. As I will describe, these four differences – peculiarities or idiosyncrasies of the industry might be better descriptions – each has its origins in the specific social and technological context of the life sciences industry and important implications for how its leaders lead. They are, in the jargon of my academic speciality, selection pressures faced by leaders in this industry. That is, leadership traits in the sector are the result of adaptation to these four factors, which cumulatively favour some leadership behaviours and discriminate against others.
Difference 1: The social contract between the life sciences industry and society
As Lars Fruergaard Jørgensen eloquently put it, at the overlap of health, science and business, there is bound to be emotion. In the words of Namal Nawana, medical technology touches people’s lives when they are at their most vulnerable. The products and services provided by the life sciences industry often are a matter of life and death. Even when they are not concerned with life threatening conditions, they have a very direct, viscerally-felt influence on the lives of patients and their families. And the group “patients and families” includes almost all of us. As Jane Griffiths put it, every one of our lives, or that of someone we love, has been or will be affected by this industry. Not all industries can make that claim and even those that can, such as utility companies, are not as emotionally salient as the life sciences industry.
This pervasive and prominent role that the life sciences industry plays in society, especially but not only in developed economies, has led to a special kind of relationship between the industry and society in general, one that is often described as a social contract. The industry’s side of this agreement is that it will provide innovative technologies to save, prolong and improve lives. From vaccines to heart valves, the industry fulfils this side of the social contract in spades. When we are healthy, we tend to take this for granted but it only takes a bout of illness, an accident or a life event such as pregnancy for the industry’s contribution to society to fall into sharp focus in the foreground of our lives. Of course, many would hope for more from this social contract; access to innovative medicines and technology is still a long way from universal and many medical needs remain unmet. But one only needs to compare our lives with those of our grandparents to appreciate what the life sciences industry has, in fact, contributed to our lives and to society in general.
In return for these evident benefits, society grants special privileges to the life sciences industry. Much of the basic science on which the industry is built comes not from its own discoveries but from publicly funded academic research. In most advanced economies, the large majority of the industry’s revenue stream comes from publicly funded or supported healthcare systems. Many societies have pricing schemes, formal and otherwise, that recognise that medical innovation is sustainable only if the financial returns are adequate. Intellectual property rules for the industry, especially in pharmaceuticals, are made to safeguard these returns. Regulation, although aimed primarily at safety, is co-created between the industry and governments with the effect of protecting the former from low-quality competitors. And, when governments devise industrial strategies to support particular sectors, the life sciences industry is always one of those favoured. There are many ways in which the life sciences market is not a free market or “perfect” in an economist’s sense of the term. In effect, society has agreed to help life science companies make money out of illness and distress because we want the benefits that flow from that arrangement.
The life sciences industry is not the only one to operate in an imperfect market with a special relationship to society. The defence sector, for example, is similarly distorted and for analogous reasons. The business of food and agriculture is notoriously politicised, regulated and managed to maintain supply and “food security”. The education sector is, to a large degree, dominated by the government customers who set its direction. But none can be said to have the same pervasive and prominent emotional connection with society that the life sciences industry has created. In a real way, the industry can be seen as much as a social mission as an economic enterprise. This social contract between the industry and society means that expectations of it are higher than for others and have a strong moral component. It also means that the people who choose to work in the industry are often driven by higher motives as well as financial rewards. As we will see in later chapters, this influences the way its leaders must and do lead.
Difference 2: The complexity of value creation and value definition
Every market has a demand side, the customers whose needs define what is and is not valuable, and a supply side, the companies who find and deliver ways of meeting those needs and so create value in the eyes of the customer. When we discuss the relative complexity of a market, we are talking of the aggregate complexity of both demand and supply. Almost all advanced industries can claim to be complex in an absolute sense. But, relative to other industries and their markets, the life sciences can reasonably claim to be exceptionally complex in both demand and supply and, without doubt, it is exceptionally complex overall.
The demand side complexity of the life sciences industry is the result of human health being intricate, our approaches to managing health being convoluted and our political systems being Byzantine, in both senses of that term. There are more than 100,000 known diseases, divided into four main classes (infectious, hereditary, deficiency and physiological) that are spread across many distinct therapy areas which correspond, very roughly, to our biological systems such as cardiovascular and central nervous systems. Add to this all the possible injuries and conditions that, strictly speaking, are not illnesses, and the market for pharmaceutical and medical technology products is revealed as not a single, homogenous market but an enormous, interconnected hive of markets.
In addition to this medical complexity, the healthcare systems through which the industry reaches its customers are enormously varied in what they treat, how they treat and how they are funded. As a global industry, the life sciences industry has to address every kind of healthcare system from the United States’ insurance-based, payment-for-service model that offers the most advanced treatments to those who can afford it, to the socialised, universal care systems of Europe, to the out-of-pocket, bare-bones provision in some emerging markets. Added to this is the third dimension of politics, which shapes how countries interpret the social contract with the industry and how they choose to regulate it. In every country in the world, healthcare is a politicised issue, which leads to variation between and often within countries. Even for firms that choose to narrow their disease and geographical focus, the market is a horribly fragmented three-dimensional matrix of clinical, economic and political issues. The truly global companies have to engage with the full scope of this complexity. Will McGuire neatly summed it up saying that, in this market, it is not as simple as inventing a great product that sells; reimbursement and health economic issues, which are based in political choices, are now as important as technological and clinical ones.
The supply side complexity of the industry is the result of the breadth and depth of both its physical and social technologies and the complex networks of organisations that are needed to create and deliver value. In innovative life science companies, the physical technology involved – the pharmacology, engineering and other applications of physical sciences – is often at the very edge of our knowledge. In pharmaceuticals, advanced therapies are now rarely simple, small molecules and are more often massive protein molecules or cell and gene therapies. In medical devices, traditional materials are being displaced by advanced polymers and composites, whilst in medical technologies connection to the “internet of things” is rapidly becoming the default option.
At the same time, traditional pharma/medtech divisions are eroding as value is created by the aggregation of several technologies. As Yukio Matsui points out, the technology involved in meeting clinical needs is now often a combination of complementary services, devices and medicines. Alongside these advances in physical technology are parallel advances social technology. That is, in the applications of social sciences such as economics and sociology. The most prominent of these is the development of health economics to understand the value of treatments, but firms also employ ethnographers, sociologists and data scientists to create and deliver value.
The corollary of this increasing depth and breadth of both physical and social technology is that it is now relatively rare for healthcare value to be delivered by a single, vertically integrated firm. More often, value is now created by a so-called “holobiont”, a network of organisations, from universities to contract manufacturers to the traditional life science company, with different but complementary assets and capabilities. As Jean-Christophe Tellier puts it, the complexity of the life sciences value chain, from basic science and discovery to marketing and support of patients and professionals, is a defining characteristic of the industry. His choice of the word “complex” is important, because the industry is not complicated like an airliner, it is complex like a rain forest. In complicated systems, the many different components remain the same, always behave the same way and the outcome of any action is predictable. In complex systems, the many different components change constantly as they adapt to each other and outcomes cannot be predicted. The life sciences industry is complex, like a rain forest, not complicated, like an airliner.
Other industries are complex, of course. The software industry has many different applications. The entertainment industry is characterised by holobionts, as you can observe when you watch the first few minutes of any movie. The social media industry combines social and physical technologies. In quantum computing, the hardware industry is operating at the limits of our knowledge. But no other industry deals with anything as intricate as human health. Other industries have convoluted supply chains but few have the symbiosis that exists between, for example, academic medical research and the life sciences industry. Many industries supplement their core technological expertise with, for instance, economic modelling, but it is hard to find any that need to demonstrate the value created across the customer’s lifetime.
Taken as a whole, the combined complexity of the demand and supply sides of the life sciences industry is exceptional. This means that the twin challenges of any business – understanding how the customers define value and coordinating activity to create and deliver that value – are exceptionally difficult. This aggregate complexity makes it harder to be successful and easier to make catastrophic errors. As with the social contract, this complexity must and does influence how leaders in the life sciences industry do their job.
Difference 3: The magnitude and longevity of risk
All businesses are risk-management businesses. The differences between them are the size of the assets at risk, the level of risk and the period over which that risk must be borne. It would be simplistic to compare the life sciences industry with businesses that involve small investments and bear low risk for short periods such as, say, the restaurant business. However, even if we compare the life sciences industry with other capital intensive, long-term industries, such as automobiles or civil engineering, the risk associated with developing an innovative medical treatment is exceptional. Allan Hillgrove drew out the implications of this very well when he said the combination of size of investment, timescale and level of risk mean that leaders in this industry need to take a much longer perspective on planning.
The cost of bringing a new medicine or medical technology to market is very large, but even this does not tell the full story of what is at risk. The figure often cited for a new drug’s development cost is $2.7 billion, a broad, averaged estimate from the Tufts Centre. The equivalent figure for a new medical device or technology is impossible to define, since the category is so much wider and innovation tends to be more incremental, but it is certainly in the range from tens to hundreds of millions. However, even these large figures are too small to realistically describe the magnitude of the industry’s risk. When calculating a return on investment, it is necessary to consider all of the assets at risk. These go far beyond development cost and must include intangible assets, such as the firm’s reputation with customers, investors and partners. If a drug or device fails in development or at launch, it erodes the asset of trust in the firm’s capabilities. As Patrice Baudry pointed out, in this industry it is particularly important to be seen as a reliable, competent partner. In the case of a drug or device failing after launch, the financial and reputational liability can run into billions. For example, Merck payed around $5 billion to settle its Vioxx liabilities and, at the time of writing, Johnson & Johnson’s Ethicon is embroiled in liability cases concerning the hundreds of thousands of women who received its vaginal mesh. When all tangible and intangible assets at risk are considered, the magnitude of risk in the life sciences industry does appear to be amongst the largest of any industry. As Louise Makin made clear, to work in this business you need to have an appetite for risk.
The second factor making the risk profile of the life sciences industry exceptional is the level of risk and uncertainty, the former being predictable and manageable, the latter being neither of those. In any business, the ultimate source of risk and uncertainty is imperfect knowledge and so it is closely correlated to the complexity of the industry and its social and technological environment. In the life sciences industry, the most prominent and visible artefacts of risk and uncertainty are product failures, the ultimate cause of which is imperfect knowledge of the technological environment.
In simple terms, the vast amount we don’t know about how the human body works can hide innumerable risks and uncertainties. In pharmaceuticals, various estimates suggest that each launched drug is the sole survivor of many thousands of initial candidates. In the more incremental development process of medical devices and technology, it is less common for products to fail and more common that many smaller but costly technical experiments must be tried before an effective, incremental advance is made. And, as the Vioxx and vaginal mesh examples demonstrate, even a successful launch cannot be considered the end of this technical, scientific risk. Real world, post-launch data can reveal failures that were invisible in development.
Traditionally less prominent than these technical risks, but becoming more salient, are risks and uncertainties associated with the social environment, including regulatory and commercial risk. The former, that the product will not gain and retain regulatory approval, is the result of increasingly complex and demanding regulatory requirements. The naïve observer might assume that, since these regulations are published, they are known and create little risk. But regulatory professionals recognise that the complexity of regulation has led to ambiguity, and therefore risk. Like technical risk, regulatory risk does not end at launch, as firms who have lost regulatory approval for manufacturing systems can attest. Commercial risk, that the product may not achieve its intended returns, has traditionally included risks around indeterminate market size, competitive intensity and operating costs. These risks remain but, increasingly, commercial risk now also includes access risk – that the product may not be considered good value by payers, and so not be paid for by state or private insurance systems. When technical risks (that the product may not work or be considered safe and effective) are combined with commercial risks (that the product may not make a worthwhile return), the high level of risk inherent in the life sciences industry becomes starkly apparent.
As if very large assets bearing high levels of risk and uncertainty were not sufficient to justify the industry’s claim to exceptionalism, these factors are also magnified by timescale. Since risk and uncertainty are the result of imperfect knowledge, and since the further we look into the future the more imperfect our knowledge becomes, risk and uncertainty are amplified as life science companies plan ahead. Meinrad Lugan made clear the necessity to think of product life cycles lasting decades not years, beca...
