Post on 25-May-2015
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ELI LILLY IN INDIA RETHINKING THE JOINT VENTURE STRATEGY
Abhay Kishore – 01Abhishek Kunal – 05Anil Kumar Jadli – 11 J.Harish – 25 Khushal Malik – 28Sharad Singh – 49
PHARMACEUTICAL INDUSTRY – Global Trend
• Mainly concentrated in the United States, Europe, and Japan
• Developing a drug from discovery to launch took 10 to 12 years.
• Cost of development of drug is between $500-$800 million.
• Drugs were strictly controlled by government agencies:
o Food and Drug Administration (FDA) – USA,North America
o CPMP – Europe
o MHW – Japan
o DPCO & Indian Patent Act - India
• Size of industry : USD 960 billion in 2012.
• Few Firms control entire market (Oligopoly).
• 4 Firms – Control 20% ,
• 20 Firms – 50-60%,
• 50 Firms – 65-75%
38%
24%
18%
12%
8%
North America
Europe
Asia
Japan
ROW
PHARMACEUTICAL INDUSTRY – Global Trend
• Covered the chemical substance itself
• Covered the method of processing or substance itself
• Offered typically 20 years of protection
• Usually a lag time of 10-12 years by the time the patent was obtained and the launch date
processing or manufacturing the product
• Very little protection because it was easy to slightly modify the process
• Prices in of the drugs varied in developed countries
• US & Canada by factor 1.2 to 2.5.
• Europe by factor 1.1 to 2.5.
• Parallel Trade: an outside company sells a patented product in a market not
Global Issues in Pharma Sector
designated to sell the drug.
o Independent firm exploited parallel trade by using the differentials in price across
various countries.
• Generic Drugs: unbranded drugs of comparable efficacy available at
fractional cost of branded product.
o Posed as major challenge for pricing power of large pharma companies.
o No additional expense for drug R&D of new compounds.
o Generic companies made money by copying the products discovered & developed
by other major pharmaceuticals companies.
Issues in Indian Pharma Sector
• Initially country had no indigenous production capability & was totally dependent on imports.
• Post independence HAL (promoted by WHO ) & IDPL (Russian assistance) were established in
1954 & 1961 respectively.
• Indian Patent Act was passed in 1970, it abolished Product patent & permitted Process patent
for 5-7 years.
• Drug Price Control Order (DPCO) instituted price control by which govt. stipulated prices for • Drug Price Control Order (DPCO) instituted price control by which govt. stipulated prices for
all the drugs.
• Many of MNCs left India which resulted in emergence of local manufacturing companies.
• Indian drug prices hovered around 5%-20% of U.S. prices due to these.
• Prime minister Mrs. Gandhi had said at World Health assembly in 1982:
“The idea of a better-ordered world is one in which medical discoveries will be free of patents
and there will be no profiteering from life and death.”
• In 1990s , post globalisation, FDI upto 51% (up from 40%) was allowed in Drugs &
Pharmaceuticals industries.
• A suitable Environment for entry of Eli Lilly entry into India.
Eli Lilly & Company
• Founded in 1876 with $1400 and 4 employees.
• Chairman Dick Wood decided to take the company global in the
mid-1980s
• By 1992, Lilly manufactured in 25 countries and sold in more • By 1992, Lilly manufactured in 25 countries and sold in more
than 130 countries.
• Company’s commitment : Technical & Managerial excellence.
• Gerhard Mayr, head, Lily International in 1992, wanted to
expand operations in Asia including India due to :
• Opening of market for foreign investment
• Opportunity for clinical testing
Ranbaxy Laboratories Ltd
• Began as a family business in the 1960s.
• By the 1990s, it grew to become India’s largest manufacturer of bulk
drugs and generic drugs.
• Had a domestic market share of 15% (1996).
• Capital cost was 50-75% lower than comparable US plants.• Capital cost was 50-75% lower than comparable US plants.
• The higher price in foreign countries provided the impetus for
Ranbaxy to pursue international market.
• It had presence in 47 markets outside India, mainly through
exports.
• R&D expenditure of company was 2-5% of annual sales.
Strategic Environment
Strategic Context
� Lilly is re-evaluating its strategy for India and“the direction for the JV, with Ranbaxy signalingan intention to sell its stake”
� Lilly’s product portfolio for India is limited
Strategic Objectives
� Take advantage of the opportunitiespresent and developing in the Indian market.
� Emphasis on emerging markets (such asIndia) to manage company growth.
� Lilly’s product portfolio for India is limited
� ELR JV depends for manufacturing anddistribution on Ranbaxy.
� India: Healthcare expenditures in India arerising; Increasing demand, improving regulatoryframework, better infrastructure; WTOmembership and resulting change in ownershiprequirements, trade, IPR/patent protections.
� Industry: Slowdown in growth (pricecompetition, shift in demand, entry of largecompetitors); Internal consolidation to achievesynergies and economies of scale; Increasingrivalry and fierce competition.
India) to manage company growth.
� Maximize returns and achieve long-termsustainability.
� Shape opinions – be a driving force in theindustry.
Porter’s 5 Forces AnalysisBarriers to Entry are high:•Economies of scale exist•High start-up capital requirements as well as investment intensive operation (R&D, clinical trials, etc.)•Forward & backward integration•Access to distribution•Experience/learning curve•Strict government policies/controls•Proprietary knowledge and patents•Brand identity/loyalty relating to patents
Bargaining Power of Suppliers is medium/low:•Suppliers are diverse and geographically dispersed•Some raw materials are basic resources – low switching costs, easily available, bulk production•Some suppliers provide differentiated inputs (i.e. R&D, APIs)
Competitive Rivalry within
Threat of New
Entrants
Bargaining power of
customers
Bargaining power of Suppliers patents
Threat of Substitution is medium:•Substitutes are available– generics vs. prescription, parallel trade•Some products exist that perform the same or similar function•Buyers may face uncertainty and/or inconvenience when switching•Existing substitute products (generics) satisfy price, value, and quality expectations •Brand loyalty usually exists
APIs)•Switching costs depend on input type
Bargaining Power of Customers is low:•Switching costs depend on drug –generic vs. patented•Substitutes are available for some drugs•Buyers are fragmented with only few influential ones (i.e. government agencies)•Product may be a critical input
within Industry
customers
Threat of Substitutes
Suppliers
SWOT Analysis
Strengths
•Lilly is one of the largest pharmaceutical companies in the world (12th largest)
•Large, durable organization•Commitment to scientific and
managerial excellence•Global influence spans 151
countries•Leading brands and R&D
capabilities•Ethical marketing & integrity •Good stakeholder relationships•World-class sales process•Expertise in clinical trials
Strengths
•Lilly is one of the largest pharmaceutical companies in the world (12th largest)
•Large, durable organization•Commitment to scientific and
managerial excellence•Global influence spans 151
countries•Leading brands and R&D
capabilities•Ethical marketing & integrity •Good stakeholder relationships•World-class sales process•Expertise in clinical trials
Weaknesses
•Patents – infringement vs. expiration
•Financial risks – increasing costs vs. pricing constraints
•Limited product focus (two groups – off-patent drugs & patent drugs with barriers to entry)
•Dependent on international sales
Weaknesses
•Patents – infringement vs. expiration
•Financial risks – increasing costs vs. pricing constraints
•Limited product focus (two groups – off-patent drugs & patent drugs with barriers to entry)
•Dependent on international sales
•Expertise in clinical trials•Expertise in clinical trials
Opportunities
•Changes in population, markets, and demands
•Emerging markets – low cost labor, new customers, etc.
•Use world for clinical testing•Shape opinion with leaders in the
medical field around the world•Strong performance of ELR JV•Shift in R&D focus (chronic
therapies)•Positive changes in India’s
business environment
Opportunities
•Changes in population, markets, and demands
•Emerging markets – low cost labor, new customers, etc.
•Use world for clinical testing•Shape opinion with leaders in the
medical field around the world•Strong performance of ELR JV•Shift in R&D focus (chronic
therapies)•Positive changes in India’s
business environment
Threats
•Ranbaxy is local market leader•Competitive structure of the
industry is evolving – consolidation trend, entry of new & large competitors
•India – weak IP protection/enforcement, new competitors
•Limitations on pricing – small margins -> cash flow constraints
•Escalating costs (R&D, clinical trials, pricing pressures etc.)
Threats
•Ranbaxy is local market leader•Competitive structure of the
industry is evolving – consolidation trend, entry of new & large competitors
•India – weak IP protection/enforcement, new competitors
•Limitations on pricing – small margins -> cash flow constraints
•Escalating costs (R&D, clinical trials, pricing pressures etc.)
Eli Lilly & Ranbaxy - The start of the JV
• JV signed in November 1992, named as Eli Lilly - Ranbaxy.
• Each had a 50% stake with an initial investment of roughly $10 million
• Board of Director of JV: comprising of 6 directors, 3 from each Company.
• Management committee comprised of 2 directors, 1 from each.
• Lilly retained right to appoint the CEO of the JV. • Lilly retained right to appoint the CEO of the JV.
• Alignment of broad values.
• Ranbaxy would supply certain products they already made under the JV
then formulate and finish some of Lilly’s products locally in India.
• Ranbaxy would also package and distribute Lilly’s products.
• Exit option: Agreement provided for transfer of share incase any partner
desired to dispose a part or its entire share in the company.
• Ranbaxy was driven by the generics business, Lilly was driven by
innovation and discovery.
Mutual Advantages to JV Partners – Complimenting
Eli Lilly
� Eli Lilly got access todistribution network in India.
� Lilly’s product portfolio wasunknown to Indian physicians
Ranbaxy
� Ranbaxy helped JV in gettinggovt. approvals, licenses,distribution & supply.
unknown to Indian physicianswhich got accepted due to JV.
� Eli Lilly built its brand in India.
� Eli Lilly built its productionfacility in India, gained economyof scale.
� JV offered life time associationto new employees to counteremployee turn over.
� Technical learning forRanbaxy.
� Lilly’s training program wasmade available to Ranbaxy.
� Ranbaxy learned global HRpractices about non-unionisedworkforce.
Why it worked !
• Andrew Mascarenhas of Lilly and Rajiv Gulati of Ranbaxy were put in
charge, shared a good rapport.
• Able to see eye to eye on most of the issues.
• Both companies had commonality on following:
• High ethical standards, honesty and integrity,
CULTURAL FIT
• High ethical standards, honesty and integrity,
• Technology & Innovation,
• Concern for employees,
• Responsible corporate citizens.
• No cannibalisation of each other’s employees
• Clarity on Governance structure,
• Selection of alliance managers,
• exit terms & conditions outlined before hand
ALLIANCE MANAGEMENT
Alliance Performance …..
• New Product launch on Human Insulin,
• Focus on therapeutic areas where Lilly had a niche.
• Focus on two group of products :
• Off potent drugs,
• Patented drugs where significant entry barriers,
• Existing product of Ranbaxy like Seclor marketed by adding significant value in • Existing product of Ranbaxy like Seclor marketed by adding significant value in
form of medical information to physician
• In 1996, JV achieved break even point & became profitable.
• New initiative like Medical Regulatory unit which handled product approval
process with govt.
• By 2001, JV surpassed the average growth rate of Indian pharmaceutical
industry.
• Sales increased by around 57% in 2000-01 & PAT increase of 103% during same
period.
Changing World Order …..
• Consolidation trend in industry through Merger & Acquisition. In 1990 top
10 Cos accounting for 28% Market, In 2000 same were accounting for 45%
of market.
• Partnership on pharmaceutical & biotechnology companies was growing
rapidly.rapidly.
• Increased challenges of
• increased R&D cost and development,
• Approval time &
• Competition from generics.
• India signed GATT & became member of WTO, according to which India
would grant product patent recognition form 2005 onwards.
• Indian govt. decision to allow 100% FDI in Drug and Pharmaceutical
industries in 2001.
• Eli Lilly had established foothold in Indian market & expanded their
network.
• Ranbaxy formulated a new mission to be a Research based
International Pharmaceuticals Company.
Change in Order …..
International Pharmaceuticals Company.
• Ranbaxy started forming JVs for developed market for US, Canada
& Ireland.
• Due to increased competition in India, JV might be less profitable
than other markets.
Strategy Alternatives
Strategy A
Restructure - renegotiate JV with Ranbaxy
• Pro: maintain successful JV; retain access Ranbaxy’s manufacturing and distribution; well established
Strategy A
Restructure - renegotiate JV with Ranbaxy
• Pro: maintain successful JV; retain access Ranbaxy’s manufacturing and distribution; well established
Strategy B
Form a new JV - find a new partner
• Pro: cooperative partner –support; potential access to manufacturing and distribution; share risk and
Strategy B
Form a new JV - find a new partner
• Pro: cooperative partner –support; potential access to manufacturing and distribution; share risk and
Strategy C
Terminate JV – establish subsidiary
• Pro: India offers many opportunities; decisions can be made with the interest of Lilly in mind; ELR successful,
Strategy C
Terminate JV – establish subsidiary
• Pro: India offers many opportunities; decisions can be made with the interest of Lilly in mind; ELR successful, distribution; well established
relationship
• Con: Ranbaxy may not easily be swayed to continue JV –possible result: lack of commitment; companies goals, structures and visions have changed – alignment may be difficult/impossible; JV mission and goals have been achieved
distribution; well established relationship
• Con: Ranbaxy may not easily be swayed to continue JV –possible result: lack of commitment; companies goals, structures and visions have changed – alignment may be difficult/impossible; JV mission and goals have been achieved
distribution; share risk and burdens
• Con: difficult to find suitable partner; negotiations take time; Ranbaxy may transfer shares without concern for company fit; JV purpose/mission?
distribution; share risk and burdens
• Con: difficult to find suitable partner; negotiations take time; Ranbaxy may transfer shares without concern for company fit; JV purpose/mission?
in mind; ELR successful, reputable company in India; revenue to support parent company; integrate technology and knowhow of subsidiary to realize company strategy
• Con: large financial commitment; country and market risk exposure; limited manufacturing and distribution channels
in mind; ELR successful, reputable company in India; revenue to support parent company; integrate technology and knowhow of subsidiary to realize company strategy
• Con: large financial commitment; country and market risk exposure; limited manufacturing and distribution channels
• Eli Lilly had established foothold in Indian market & expanded their
network. It may pursue its focus on innovation & discovery.
• Ranbaxy formulated a new mission to be a Research based
International Pharmaceuticals Company. It may pursue its focus on
Conclusion: Strategy C is suitable for Eli Lilly as well as Ranbaxy in prevailing business scenario
International Pharmaceuticals Company. It may pursue its focus on
generics.
• Due to increased competition in India JV might be less profitable
than other markets.
• Ranbaxy started forming JVs for developed market for US, Canada
& Ireland. Ranbaxy was experiencing cash flow difficulties due to its
network of international sales and selling its share would give a
chance to improve its financial situation.
Conclusion: Strategy C is suitable for Eli Lilly as well as Ranbaxy in prevailing business scenario
•The strategy will help Lilly to increase and strengthen its foothold in India which it
has gained over the years from the JV
•Enable the company to take advantage of recent positive market developments
(economic and political).
• Address key issues and concerns faced by Lilly, while allowing the company to
respond to global as well as local industry changes.respond to global as well as local industry changes.
•Will be able to utilize its core competencies to take advantage of the many
opportunities present in the Indian market.
•To use India for clinical testing through ELR’s medical infrastructure and expertise in
clinical trials. It will allow the company “to provide clinical trial data to support global
registrations” as well as proactively manage costs which is a global concern.
• Help to returns will be maximized and profitability increased, thus meeting Lilly’s
strategic objectives .
Thank youThank you