I wrote a piece for my employer hyping our attendance at Pharmapack and discussed how a recent cold medicine recall was an example of a Pharmaceutical company not engaging with their market outside of their core competencies. I want to expand on it to capitalize on a trending mental model in the Tech Sector called the “Stack Fallacy”, a mechanism by which small, nimble companies are disrupting longstanding incumbents. If you don’t feel like reading the article, just bear in mind that recently there was a voluntary recall of children’s cold medicine due to an incorrect dosing cup being copackaged with the syrup.

If you’re not familiar with the term Stack Fallacy, I highly recommend Chris Mims’ piece in the WSJ. He interviews Anshu Sharma, the Silicon Valley VC who coined the term and uses it to explain what The Innovator’s Dilemma couldn’t – Why companies fall prey to more nimble competitors.

Mr Sharma explains that the Stack Fallacy “…is the mistaken belief that it is trivial to build the layer above yours,” Companies can move up and down the stack, with success depending on the direction; down is easier than up. Moving up the stack brings you closer to your end-user, and success will ultimately depend on who understand their users the best.

A great example of this is the Netflix vs. Blockbuster saga that played out a few years ago. Netflix started with a limited catalogue of product but focused on their audience’s needs from the outset and sought to improve the media-consumption experience, whereas Blockbuster doubled down on content, their core competency where Netflix couldn’t compete, but did little to improve the process by which a consumer would access and consume that content. We all know how this ended for Blockbuster.

Netflix, by improving the user experience of accessing and consuming media, could easily move down the stack into Blockbuster’s domain of content cataloguing but Blockbuster, having never engaged with the in-home consumption experience, lacked the information needed to attack Netflix’s dominance.

Now, if we grab a Medtech shoehorn and revisit my CDP article I argue that consumers interact with product components that are arguably outside the core competencies of many Pharmaceutical companies. With Healthcare traditionally lagging Consumer Tech, it would be nice to think that we’re going to start seeing this trend play out in the coming years but I don’t think it’s quite so simple. Let me expand further.

We can think that in Pharma, the core piece in the “stack” is the formulation, one layer above this is the delivery mechanism, and one layer below is some piece of biochemistry that enables the API manufacturing. While oral (enteral) drug delivery is the preferred route, in more complex cases some form of device will be used (typically parenteral or transmucosal) and in the case of the recall we previously spoke about the delivery device was a dosing cup.

A company moving down the stack is akin to vertical integration, something easily achieved and strengthens their market position. For our Pharmaceutical colleagues going through a voluntary recall, moving down the stack could be achieved by extending their control over their product’s supply chain, particularly since they know what they need better than their suppliers. Outright purchase of the supplier is often easiest.

This same perspective is why it’s difficult to move up the stack. Mr Sharma argues “They don’t have firsthand empathy for what customers of the product one level above theirs in the stack actually want.” A contract drug delivery device manufacturer is going to have greater firsthand experience with user’s device needs than a Pharmaceutical company driving development from a formulation/primary pack perspective. Extending the Stack Fallacy further, a packaging manufacturer is going to have a better understanding of how packaging can enrich the user’s experience (and potentially dosing compliance) versus a device manufacturer versus a formulation company.

Returning to the recall, we can think of it as a strong example of a company falling victim to the Stack Fallacy by not placing a great enough emphasis on the user touchpoints outside of their core competency. This is present in the language used to describe the recall: “There have been no reports of adverse events to [company] as a result of the incorrect dosage markings.” Sure, but how do your customers feel about the whole situation? Granted they did issue a voluntary recall but I struggle with their motivations being anything more than optics rather than actually engaging with the issue.

As Christopher Mim’s points out in his WSJ article “It is also worth noting that the stack fallacy is just that: a fallacy and not a law of nature. There are ways around it.” Mr Sharma argues that in terms of a given market, the winner will always be the entity that understands the user the best.

As I mention above, I want to think that we’re going to start seeing this trend mirrored in the Pharma/Medtech industry because then I’d be in a great position to capitalize on it but I just don’t think it’ll play out as straightforward as one might think and I’ll argue that the traditionally conservative nature of the industry is the reason why.

Let’s go way back to 1972, to PW Anderson’s landmark publication More is Different. It’s an absolutely brilliant paper that invalidates XKCD’s classic Purity comic by arguing that each hierarchical level of Science has its own unique fundamental principles,the comprehension of which are required for advancement of the field. So while people may still think that Social Science is just applied Psychology and Psychology is just applied Physiology, the actual fact is that each of these distinct levels of Science has its own entirely new set of laws and concepts that must be harnessed to truly impact the field.

What this has to do with Medtech/Pharma and the Stack Fallacy is that these are two industries where the classic Silicon Valley “Move Fast and Break Things” mantra will land you in deep water with a Regulatory Agency (Hello, Theranos). As such, new fields of therapy have time to mature and demonstrate safety and efficacy, giving incumbents time to align themselves strategically with where the market might be heading, unlike in Tech where a new startup can raise millions seemingly overnight and immediately threaten your market position.

Medtronic is a brilliant example of this. In 2015 alone, on top of their MASSIVE tax inversion merger with Covidien, they bought Advanced Uro-Solutions, Diabeter, CardioInsight Technologies, Aptus Endosystems, RF Surgical Systems, Medina Medical, and Lazarus Effect. Anywhere Medtronic wants a chunk of the market, they can simply acquire a company in that area. Why bother innovating internally why you can acqui-hire entire companies?

Even more recently, Unilife (device manufacturer) handed Amgen (not a device manufacturer) access to their wearable injectors within certain drug classes and non-exclusive rights to all of their injectable drug delivery systems for $75Million. Buying the next level in the stack.

What’s the point of all of this? Like how More is Different argued that each layer in a scientific hierarchy is fundamentally different than its upper and lower neighbours, moving laterally between fields like Consumer Tech to Medtech  or Pharma will present a fundamentally different set of rules to navigate and ignoring them will come at great financial peril. So while it’s great to take design motivation from tangential industries, looking to capitalize on market trends is never so simple.