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Strategic approaches in life sciences frequently concentrate on emerging technologies or groundbreaking discoveries, focusing on investments that can lead to significant market value, regulatory approval, or acquisition. This is understandable, given the substantial technical risks that many companies face at the onset. As a result, the focus tends to shift away from developing intricate business models, as achieving successful experiments is a considerable achievement. Once foundational experiments succeed, the pathways to market become clear, allowing companies to adopt traditional business models similar to their peers. However, as the technical risks diminish or become more discernible, there exists an opportunity for more innovative business model designs.

A concept introduced nearly two decades ago by Joel Spolsky, known as "Commoditize Your Complement," is gaining traction in the life sciences sector. Basic microeconomics teaches us about substitutes—products that can replace one another, such as generic drugs versus newly approved medications—and complements—products that are typically purchased together, like hospital beds and ambulance services. While many companies emphasize substitutes and competition, focusing on complements often offers a strategic advantage, as they tend to be non-competitive and can create formidable barriers to entry. The fundamental principle is that when the price of complements declines, the demand for the primary product increases, although this model has limitations in markets with perfect substitutes, like electricity or gold.

Here are some key takeaways to consider:

1. To commoditize a complement, companies should identify markets where suppliers are commoditized or can be—this can depend on the underlying technology, distribution methods, or market fragmentation.
2. Entrepreneurs often seek expansive markets where customers are overcharged, primarily competing as substitutes. An alternative approach that may yield equal or greater success is to target markets where complements can be commoditized.
3. A company that can make a complement abundant can offer scarce products, creating a "desert of profitability" around its operations. Life sciences firms benefit from intellectual property (IP) and innovative distribution methods, as exemplified by companies like Illumina and Express Scripts.
4. Eight examples illustrate this framework's application in life sciences: Adimab, Illumina, Benchling, Novartis, Twist Bioscience, Express Scripts, Parker Institute for Cancer Immunotherapy, and Deerfield.

In the life sciences arena, market dynamics are shaped by supply and demand. Typically, a company serves as both a customer to some suppliers and a supplier to others. Understanding your position within this supply chain significantly influences growth prospects and profitability. The interplay between suppliers, distributors, and customers is crucial; while suppliers transform raw materials into products, distributors ensure that customers receive these products. Notably, distributors wield considerable market power in life sciences, with the Internet yet to revolutionize this aspect.

Horizontal monopolies dominate specific segments of the supply chain, while vertical monopolies aim to control the entire process within their industry. The concentration of supply and demand is a critical factor that affects a company's ability to commoditize complements and potentially establish monopolies. The competition among these entities creates new opportunities while challenging established players. While monopolies are rare in life sciences—due to the complexities of drug development—there are niches where unique businesses can flourish.

To successfully commoditize a complement, companies must seek out markets with commoditized sellers or potential candidates, determined by technology, distribution, or supply fragmentation. Ideally, a company that controls demand can diminish the power of distributors; when demand exceeds supply, it gains significant market leverage. On the other hand, controlling supply typically requires a vertical monopoly. Many underserved customers in markets ripe for a "commoditize your complement" strategy are seeking new products to address their needs. Entrepreneurs often focus on large markets with overcharged customers, heavily competing as substitutes. However, an equally effective approach could involve targeting markets where complements can be commoditized.

When a company successfully commoditizes its complement and captures a significant share of the supply chain, businesses both upstream and downstream will adapt to enhance their competitive standing, resulting in market consolidation. This dynamic leads to a push-and-pull scenario across various industries, where firms with the most market power generate the highest profits. Three primary strategies can be employed:

1. Demand-side: A company with direct customer relationships can generate network effects and reduce transaction costs. For instance, a PCR device manufacturer selling directly to labs avoids distributor fees and gains valuable insights for future upselling.

A business thrives when its costs remain stable over time while sales and customer numbers increase. This phenomenon is prevalent in software, certain life sciences sectors, and potentially others. Life sciences companies, from pharmaceutical developers to synthetic biology firms, have yet to fully leverage direct-to-consumer marketing and sales. Consumer technology firms are highly valued because they own customer relationships, presenting life sciences companies with the chance to reinvent existing products and serve consumers directly.

2. Supply-side: This approach aggregates supply within a market, enabling price increases or vertical integration. However, continuous supply additions incur costs, making this model particularly effective in life sciences where companies dominate critical inputs, such as DNA or sequencing machines.
3. Multi-side (frictionless): Companies that can aggregate both demand and supply face challenges but can create innovative models. While difficult from both business and legal perspectives, this has been achieved, particularly in consumer software. Google is a prime example, albeit still facing market threats.

Adopting these varied market strategies can transform industries and generate substantial value. A company that makes a complement readily available can sell a scarce product, fostering a "desert of profitability." Life sciences firms have significant leverage through IP and innovative distribution models, as demonstrated by Illumina and Express Scripts. Ultimately, dominant players that commoditize their complements may create low-margin environments for other supply chain participants, limiting their ability to invest in IP or distribution, thereby establishing enduring businesses with minimal competition.

Increasingly, life sciences companies express concern that previously neutral products could become commoditized, disrupting their business models—consider the implications for synthetic biology fermentation or drug discovery synthesis. Innovative companies employing this strategy are poised to lead their markets.

This framework is relevant for pure software products, but the concept of commoditizing complements can extend to any industry where software plays a significant role. In life sciences, while the model differs from those seen in companies like Google or Facebook, it holds considerable potential. The framework is most effective in sectors where capital investment can reliably translate to increased demand or pricing power, and where integration within the supply chain is feasible. Life sciences firms enjoy high gross margins comparable to those in software, and as software increasingly permeates the life sciences sector, many biology companies possess strong IP defenses that justify substantial upfront investments to enhance pricing power. Moreover, the difficulty in replacing software solutions preserves the value of initial capital investments, especially in areas like antibody manufacturing standards.

To illustrate the power of this framework, several case studies exemplify successful implementations in life sciences. It is crucial to note that traditional business models will persist due to market structures, but evolving dynamics present opportunities to create unique offerings:

Adimab and Antibodies

Adimab invested over $40 million into developing its yeast platform for antibody humanization. This investment aimed to reduce the costs associated with antibody humanization, allowing the company to pursue downstream licensing opportunities and execute more deals.

Illumina and Sequencing

Illumina adopted a razor-and-blade business model in sequencing, mastering sequencing-by-synthesis and emerging victorious in the sequencing competitions of the 2010s. The company strategically lowers sequencing costs periodically to deter competitors and boost demand for its consumables.

Benchling and a Design Tool

Benchling offers a biological design tool at no cost to cultivate a robust user base in the life sciences sector, ultimately driving demand for its automation tools.

Novartis and Academic Research

Novartis has committed significant resources to research at UC Berkeley, aiming to unlock new drug discoveries for challenging targets. This collaboration resulted in the Novartis-Berkeley Center for Proteomics and Chemistry Technologies, with potential benefits for both Novartis and the broader biopharma community.

Twist Bioscience and Synthesis

Twist is primarily regarded as a drug company rather than a synthesis firm, reflecting market perceptions and strategic decisions. Facing a relatively small synthesis market, Twist is gradually reducing synthesis costs, akin to Illumina's strategy, to stimulate demand for its antibody libraries.

Express Scripts and Drug Prices

Express Scripts, a leading player in drug pricing, controls over 95% of the market alongside other top pharmacy benefit managers (PBMs). With a substantial market share, Express facilitates cost-effective distribution from manufacturers to patients, allowing it to wield significant influence over drug reimbursement rates.

Parker Institute for Cancer Immunotherapy and Clinical Trials

The Parker Institute is at the forefront of advancing clinical trial designs for cell therapies by implementing concepts like master protocols and basket trials. Their investment in improving trial predictability and accessibility positions them to benefit from the biotech ecosystem they have fostered.

Deerfield and Translational Research

Deerfield has invested in institutions like the Broad Institute and Columbia University to promote translational research. This strategy not only aims to facilitate new discoveries but also positions Deerfield to gain early insights, enhancing their investment portfolio in life sciences.

These case studies highlight the positive outcomes for patients and customers when the costs of complements are reduced. The potential exists to translate these concepts into pharmaceuticals and create innovative models for delivering biological products directly to consumers and businesses. Emphasizing both substitutes and complements can lead to transformative business models that reshape markets, expand access, and foster monopolistic advantages in life sciences. For entrepreneurs in this field, the essential question is: what are your complements?

As we navigate the ongoing challenges posed by COVID-19, let’s remain vigilant and prioritize safety. We are fortunate to live in an era equipped with advanced technologies and healthcare systems capable of monitoring and addressing this virus. The journey continues.