Innovative Business Models in Life Sciences: Focus on Complements
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Introduction to Life Sciences Strategy
In the realm of life sciences, strategic approaches often pivot on the adoption of new technologies and discoveries. Investors usually place their bets on innovations, expecting these ventures to yield enough value to secure market approval, achieve public listing, or attract acquisition interest. This trend is largely attributable to the high technical risks that many companies face at the onset. Such risks limit the scope for extensive contemplation of business models; for many, simply achieving successful experimental outcomes is already a significant accomplishment. Once initial hurdles are surmounted, the pathways in life sciences become clearer, allowing companies to adopt conventional business models akin to those of their peers. However, the intense focus on scientific exploration often leaves little room for reimagining business strategies. With a decrease in upfront technical risks becoming more identifiable, there emerges an opportunity for innovative business model design.
Understanding Substitutes and Complements
A concept initially introduced for software businesses by Joel Spolsky, termed "Commoditize Your Complement," is gaining traction in the life sciences sector. Basic economics teaches that substitutes are products purchased instead of similar alternatives—such as a generic drug versus a newly approved one. Conversely, complements are products acquired alongside another—like the costs associated with a hospital bed, which often include ambulance fees. While many companies concentrate on substitutes and competitive dynamics, a strategic focus on complements can provide a significant competitive edge. This approach often leads to the creation of robust barriers to entry.
The principle at work is straightforward: as the price of a complement decreases, the demand for the primary product typically rises. However, this model is less effective in markets characterized by perfect substitutes, such as electricity or gold.
Key Insights
To effectively commoditize a complement, companies should identify markets with sellers that are either already commoditized or on the verge of becoming so. This can hinge on factors like the underlying technology, distribution methods, or the fragmentation of the supply chain. Traditionally, entrepreneurs seek expansive markets where customers are likely overpaying, often prioritizing substitute competition. An alternative, potentially more impactful strategy involves targeting markets where complements can be commoditized.
Essentially, companies that manage to create an abundance of a complement can capitalize on selling a scarce product, leading to a "desert of profitability" surrounding their business. Many life sciences firms, leveraging intellectual property and innovative distribution strategies, are currently implementing this model successfully. Examples include Illumina and Express Scripts, both of which are reaping significant benefits.
The Dynamics of Supply and Demand
In life sciences, understanding one’s position within the supply chain is crucial for growth and profitability. A new technological development can unlock new business opportunities, yet the existing market structure often dictates viable business models. Generally, markets consist of three core components: suppliers, distributors, and customers. Within the life sciences domain, distributors wield considerable market power—a shift not yet fully realized by the digital revolution.
Horizontal monopolies dominate specific areas of the supply chain, while vertical monopolies aim to control the entire process. The concentration of supply and demand significantly influences a company's capacity to commoditize complements, often leading to the disruption of incumbents. While monopolies in life sciences are challenging to establish due to the complexities of drug development, unique business models can emerge in select areas.
Strategies for Market Adaptation
To commoditize a complement, companies should ideally control demand and minimize distributor influence. If demand becomes more concentrated than supply, the company can leverage greater market power. Conversely, achieving a vertical monopoly—akin to the likes of Rockefeller or Carnegie—requires a different approach. Many customers in these markets remain underserved, seeking new solutions to their problems.
While traditional business models will persist in life sciences, there is a burgeoning opportunity for innovation driven by evolving market dynamics.
Economic Concepts: Complements and Substitutes Explained
This video delves into the fundamentals of complements and substitutes, illustrating their significance in economic theory and practical applications.
Substitute Goods & Complementary Goods: Interesting Economic Facts
This video provides an engaging overview of substitute and complementary goods, highlighting their roles in market dynamics and consumer choice.
Real-World Applications of the Framework
Several life sciences companies exemplify the potential of this framework in action:
Adimab and Antibody Development
Adimab has invested heavily in its yeast platform to reduce the costs associated with antibody humanization. This strategic move allows the company to secure more licensing agreements downstream.
Illumina's Sequencing Strategy
Illumina has effectively implemented a razor-and-blade business model, consistently lowering sequencing costs to maintain competitive advantage and stimulate demand for its consumables.
Benchling's Biotech Tools
By offering a biological design tool for free, Benchling has cultivated a substantial user base, ultimately driving demand for its automation solutions.
Novartis and Academic Collaborations
Novartis has invested significantly in research partnerships, such as with UC Berkeley, to foster innovations that could lead to new therapies for challenging diseases.
Twist Bioscience's Market Position
Twist Bioscience, primarily viewed as a drug company, is focused on reducing synthesis costs to enhance demand for its antibody libraries.
Express Scripts and Drug Pricing
As a leading player in drug pricing, Express Scripts controls a significant portion of the market, ensuring efficient distribution while establishing a strong hold over reimbursement rates.
Parker Institute's Clinical Trials
The Parker Institute is revolutionizing clinical trial designs, particularly for cell therapies, benefiting by enhancing the predictability and accessibility of these trials.
Deerfield's Research Investments
Deerfield Management's strategic funding into institutions like the Broad Institute aims to bolster translational research, positioning them favorably for future investments in life sciences startups.
Conclusion
The examples outlined highlight the potential for improved patient outcomes and business success by focusing on reducing the costs associated with complements. By innovating business models in the life sciences sector, particularly in areas such as infectious diseases and molecular diagnostics, companies can expand their markets and enhance access to essential technologies. Ultimately, a dual focus on both substitutes and complements can lead to the emergence of powerful market positions.
In these challenging times, let us prioritize the safety of our loved ones and appreciate the advancements in technology and healthcare that allow us to address global health crises. The journey continues.