Evolution - Today more than ever before, the pharmaceutical industry can rely on solid fundamentals for growth. A steadily growing and aging world population is expanding the industry's base of potential patients, and rising incomes in emerging economies are contributing to increased demand for pharmaceutical products. However, the industry faces many pressure points, from pricing and regulatory hurdles to patent expirations, thinning drug pipelines and efficacy issues. Such macro changes have forced pharma companies to move away from their monolithic blockbuster business model, dubbed Pharma 1.0, to become more innovative, collaborative, diversified, global and value-driven - the model we call Pharma 2.0. The global financial crisis has added a new sense of urgency that has accelerated this transformation. But, as the industry is in the midst of its Pharma 2.0 journey, new and sweeping trends have emerged that are already reshaping the business environment.

This changing environment will increasingly require a more profound reconfiguration of the industry's business model, a Pharma 3.0 model based on delivering a sustainable value proposition centered on health outcomes.

Pharma 2.0: Expanding Markets, Improving Efficiencies

As the industry has progressed from Pharma 1.0 to Pharma 2.0, it has rebuilt itself on six strategic pillars:

1. Emerging Markets
Many industry players are counting on emerging markets to extend the life of mature products as well as to develop new buyers for their products. To do so, they are targeting the burgeoning ranks of the middle class in developing countries - a strategy that has obvious benefits in the near and long term. This strategy has expanded business from the major markets of the U.S., Europe and Japan to a fourth block: BRIC (Brazil, Russia, India, and China) and the next 11 emerging markets (Mexico, Nigeria, Egypt, Turkey, Iran, Pakistan, Bangladesh, Indonesia, Vietnam, South Korea, and the Philippines). Yet, as promising as emerging markets are, they represent an enormous challenge for an industry that has focused so much of its efforts on selling to the top of the income pyramid.

International expansion requires a more holistic view that takes into account the dynamic environment of emerging markets, as well as the need for a more sustainable approach to patients at the base of the income pyramid.

2. Commercial Models
As the industry's customer is increasingly less the physician and more the payor of the patient, pharma companies have faced a range of strategic decisions. The global market landscape is highly fragmented, with varying customer topographies and no one-size-fits-all commercial model. In response, the Pharma 2.0 industry has reshaped its sales force and moved toward differentiated, geo-tailored commercial models with a value proposition customized for each market and customer. Resources have been optimized to address all stakeholders on the market continuum, from using an integrated key account model in restrictive markets to employing a traditional sales force in open markets.

3. Innovation
With the patent cliff on the horizon, where more than three dozen big-selling drugs will go off-patent between 2011 and 2013, the need to reinvigorate pipelines is more pressing than ever. As scientists continue to understand disease at the molecular level, they are increasingly empowered to develop more specific and efficient treatments, matched to patients' genetic profiles with the potential of a greatly diminished risk of adverse reactions. In response, pharma companies are pursuing strategies around scientific advancements - prioritizing therapeutic and disease categories, pursuing biotechnology and personalized medicine, and realigning their organizations to break down silos and broaden collaboration with external partners such as academia, biotechnology and medical technology start-ups, or service providers such as custom research or clinical research organizations

4. Diversification
As the prescription drug market becomes increasingly unpredictable in pricing, reimbursement and generic competition, companies have been diversifying heavily into other business lines such as vaccines, generic over-the-counter products, animal health and medical technologies. Big Pharma players vary considerably, however, in their degree of diversification. Companies such as Bristol-Myers Squibb and AstraZeneca represent the most pharma-focused, and Johnson & Johnson and Novartis, the most diversified. Yet most companies have moved in lockstep toward generics, with a focus on emerging markets.

5. Merger And Acquisition (M&A)
In the face of steep pressures - from the patent cliff to the need to increase margins and accelerate diversification - the industry continues to engage in M&A. Strategies range from filling pipelines, acquiring growth prospects and extending geographic reach to pursuing mega-mergers for scale and potential cost savings through synergies. With a further acceleration of the consolidation expected, the impact of the recession and selectively constrained capital markets will keep some would-be acquirers on the sidelines, and force others to reevaluate how they structure and fund their transactions.