The Boom, Not Doom, Of Market Failure

While it might seem that the disruption du jour is all anybody is ordering these days — making innovation, growth and new value seem like insurmountable things — businesses should focus on where they can find value most quickly.

Three common challenges plague companies today: non-consumption, organizational friction and market failure. However, such unexpected failures provide opportunities for solutions, and solutions are the source of explosive value.

Take any expanding company and ask: What underlies your growth? Across industries and time, explosive value has come from addressing market failure, organizational friction and non-consumption head-on, through the development and deployment of new assets and capabilities. These issues create a white space or void; an opportunity in which an innovative solution can provide businesses with the value and growth they seek.

Let’s take an example of a specific market failure impacting many of us — and nearly everyone who touches the healthcare system — that is rapidly becoming a new source of explosive growth: that of anti-microbial resistance (AMR).

Governments, professionals and the media are among those who have declared AMR to be a growing and unmitigated health crisis. Infections caused by drug-resistant bacteria claim tens of thousands of lives in the developed world and an estimated 500,000 world-wide, and cost billions of dollars each year.

Overuse of existing antibiotics and decreased industry investment in the development of new ones has led to weakening lines of defense against emerging superbugs. Moreover, the absence of effective, rapid point-of-care diagnostics leaves doctors to treat “empirically,” relying on informed guesswork about which medicines a patient’s infection might respond to — often in situations where a few hours’ delay in commencing effective treatment can mean the difference between life and death.

The gap between the significant need for innovation in this arena and the meager returns to those who invest in it represents a market failure. How so? The typical pharmaceuticals business model is based on the price-times-volume equals revenue model, meaning investment focus.

However, anti-microbial resistance does not follow this model, because the more the drugs are used, the lesser the efficacy of those drugs. The lesser the efficacy, the fewer the drugs sold. And so, the typical price-times-volume model breaks down, which explains why we have so few pharmaceutical companies investing in this critical health area, reflecting a serious market failure.

This is a classic example where a public good (in this case, more effective antibiotics) requires both public and private sector innovation. This is a mounting area of attention, with emerging new models and explosive new sources of value waiting to be captured by new types of players and models tackling this market breakdown.

The crux of the antibiotics problem lies in the nature of resistance — accelerated through the (over) use of antibiotics, making it nearly impossible for any particular company to capture the returns of their investments.

How do you incentivize large companies to develop drugs that need to be used sparingly?

Tackling AMR involves using drugs more sparingly, which goes against the price-times-volume model of the typical pharma company, as well as having better insight into which drugs are best suited to treat specific symptoms. The former requires a new return model and the latter, more effective diagnostics. 

While the larger pharma companies slowly pulled out of the antibiotics market, a number of smaller biotech firms began to focus on new clinical biomarkers for different types of infections and, consequently, new ways to target them.

With attention turning toward AMR by policy makers, provider networks, physician groups and associations like the American Society of Microbiology, the movement to begin paying for clinical outcomes rather than merely fees for services is leading to new ways to engage the market, both in terms of return models and diagnostic capabilities.

A few of the large pharmaceutical companies have started to creep back into the antibiotics marketplace; cautiously, then aggressively. For example, in 2014 Merck acquired Cubist, a rapidly growing biotech firm with a focus on targeted antibiotics development. Roche is also expanding its global antibiotics market footprint.

Both have recognized that they cannot go it alone, and are beginning to explore different types of partnerships with a range of organizations — policy, micro-biology, insurance, technology, etc. —  each with its own expertise that together is critical to tackle this public goods problem.

One of their key focuses is clearly on return models. For example, how do you incentivize large companies to develop drugs that need to be used sparingly — through tax credits, efficacy payments upon demonstration of effective treatments or extending patent exclusivity? These are issues to monitor on the return side of the market failure equation.

The antibiotics market space is one of many examples of market failure, which requires new ways of engaging the market to capture explosive new sources of value. The very nature of this market failure requires new partnerships and the utilization of new methods of insight and execution.

What is known as “systems medicine” is the key to enabling predictive insight and appropriate, targeted treatment for infections.  What’s more, the convergence of systems medicine with computational insight and big data is facilitating new business and policy partnerships that are expected to exploit the newly unlocked value of a previous market failure.

Stay tuned, because the solution to the antibiotics dilemma will have lessons for other areas of market failure when it comes to unlocking value.