eli lilly-ranbaxy alliance

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ELI LILLY RANBAXY Group 1 Akhil Ajith Mathews Krishananad S Pai Lalima Bassi Nidhi Soni Sidhant Gupta Tarun Jain Kshitij Ahuja Group 2 Anubhav Gupta Gautam Hariharan Karan Jaidka Mayank Bathla Saurabh Saxena Vibhav Srivastava

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Page 1: Eli Lilly-Ranbaxy Alliance

ELI LILLY RANBAXYGroup 1 Akhil Ajith Mathews Krishananad S PaiLalima BassiNidhi SoniSidhant Gupta

Tarun JainKshitij Ahuja

Group 2Anubhav GuptaGautam HariharanKaran JaidkaMayank BathlaSaurabh SaxenaVibhav Srivastava

Page 2: Eli Lilly-Ranbaxy Alliance

Life cycle of a JV

Rethinking the Business Firms compelled by the pressures and threats posed by new or international

competitors begin reassessing their businesses to enhance their competitive positioning, including thinking of forging alliances

After thinking of forging an alliance, the form must establish the role it wants the alliance to play in its overall business strategy

Crafting an Alliance Strategy It involves evaluating a firm’s value activities to determine which activities add the

most value to itself and which can be performed by other firms (alliance partners) and to re-distribute them accordingly

In this way, the firm can leverage itself through ‘borrowing’ from partners and freeing up its own resources

In the event of an ally turning adversary, firms maintain fallback and strategic options to avoid adverse eventualities

Structuring the Alliance An alliance structure is given utmost importance. An appropriate structure should

facilitate the realization of a firm’s strategic objectives and should be operationally feasible

The structure is determined by the role the relationship is expected to play in the firm’s long term strategy, the operational efficiency the firms would achieve and the learning the alliance partners would derive

Firms come together when they feel they have something to offer in return for something (bargaining power)Evaluating Alliances

Both ongoing management and timely intervention play a part in ensuring that an alliance meets expectations

Firm’s diverse experience with the potential and pitfalls of various alliance partners allow them to revisit and modify, as necessary, their original alliance based strategies

Page 3: Eli Lilly-Ranbaxy Alliance

Global Pharmaceutical Industry in 1990s

Global Pharmaceutical Industry• Growth drivers • Increasing worldwide incomes• Universal demand for better health-care

Changes in 1990s• Rising health-care costs -> increased scrutiny of Pharma companies• Rise of generics -> Challenged the pricing power of the Pharma companies• HMOs were growing and consolidating their drug purchases -> Increasing power of the buyer• US Government was looking to implement comprehensive health plan with emphasis on generics

Indian Pharmaceutical Industry• DPCO and 1970 Patent Act encouraged generic drugs production

Changes in 1990s• FDI encouraged by increasing maximum limit of foreign ownership to 51% from 40%

Page 4: Eli Lilly-Ranbaxy Alliance

The Companies

Eli Lilly Ranbaxy 1876 – founded in United States “Commitment to scientific and managerial

excellence” Before 1950

Passive strategy Most OUS were export focused

1950s Undertook systematic expansion Set up affiliates overseas

Mid-1980s Active strategy ELIC – separate division was formed

1992 Manufactured and distributed through

25 countries Sold in more than 130 countries

Future Plans - Expansion in Asia Opening of markets for foreign

investment Opportunities to use world for clinical

testing Shape opinion with leaders in medical

field around the world

1960s – founded in India “Our mission at Ranbaxy is to become a

research based international pharmaceutical company”

Strengths Visionary Management

Turned family business into global corporation

Supported tough patent regime Operational leadership

Advantages Capital costs were 50%-75% lower than

US counterparts Stricter quality control requirements in

developed countries Presence in 47 markets outside India through

exports handled through an international division

Future Plans To increase R&D expenditure to 7-8% of

annual sales from 5%

Page 5: Eli Lilly-Ranbaxy Alliance

Eli Lilly Learn the manufacturing and distribution of generic and bulk drugs at lower costs from

Ranbaxy

Ranbaxy Laboratories Learn from the product innovation and medicine breakthrough processes of Eli Lilly as it

plans to increase R&D spend by 7% - 8%,

Eli Lilly Competitive advantage comes from its focus on innovation and the patents it had for various medicines Combination of highly sophisticated technology and R&D gives “Competitive advantage to bringing

breakthrough medicines” Experience of over a century, commitment to scientific and managerial excellence and global reach

Ranbaxy Laboratories India’s largest manufacturer of bulk drugs and generic drugs and strong domestic market share (15%) Core competency: Chemical synthesis capability, Capital cost 50% – 75% lower than US counterparts Solid manufacturing base with strong backward integration from lab to market

Eli Lilly After liberalization of Indian markets, it had the option of either establishing a subsidiary or

having a JV with an established player to benefit from lower cost of production in India It had the option of exporting its drugs to Indian market or have a JV to utilize the marketing

network and knowledge of a established player

Ranbaxy Laboratories It could use the developed drugs of other player and focus on its core strength of

manufacturing generic drugs or invest in R&D to develop its own product portfolio Ranbaxy could have grown its established global marketing network or take the help of

dominant global players

Eli Lilly Dependent on Ranbaxy’s knowledge of lower cost of manufacturing of generic and bulk

drugs Dependent on Ranbaxy’s established distribution network

Ranbaxy Laboratories Dependent on Eli Lilly for lower cost of intermediate pharmaceutical ingredients Dependent on Eli Lilly’s global distribution network

According to agency theory, for smooth governance the goals of partners and alliance managers should be aligned. In this JV motives of the JV were benefitting both the partners by:

Eli Lilly was getting access to Indian markets and also manufacturing drugs at a lower cost Ranbaxy was getting access to knowledge/ learning’s of global leader in pharmaceuticals

and lower cost sourcing of intermediate pharmaceutical ingredients

Resource Based View

Rethinking the Business

Transaction Cost

Rationale

Organizatio-nal

Learning

Resource Dependen

ce

Agency Theory

Page 6: Eli Lilly-Ranbaxy Alliance

Creating the Alliance Strategy

Eli Lilly

• New Emerging Market Access• Gain local market knowledge from Ranbaxy• Low cost procurement of pharmaceutical ingredients• Distribution Network• Supplier Network of Ranbaxy• Focus on manufacturing generics, scrapped later• Easier access to government approvals, licenses

Ranbaxy

• Credibility from Lilly’s reputation in international market• Build presence in global market, already had presence in 47 markets outside India• Step to fulfill Ranbaxy mission’ of becoming research based international pharmaceutical company• Acquire skills by learning from Eli Lilly which had experience of more than 100 years

Synergies

• High Ethical Standards• Focus on technology and innovation• Believed in future of product patents in India

Alliance Overview

• JV formed in November 1992• Authorized capital of 200 million rupees, initial subscribed equity capital of 84 million rupees• Equity ownership of 50 percent each

Page 7: Eli Lilly-Ranbaxy Alliance

Structuring the Alliance

ELI LILLY- RANBAXY

$7.1 million

6 directors- 3 from each

company

50% 50%

Management committee

Board of Directors

2 directors- 1 from each

company

Andrew Mascarenhas, GM,

Lilly (MD)

Rajiv Gulati, Director,

marketing & Sales

Sales Manager

HRMFinancial Analyst

Medical director

Lilly brought R&D whereas Ranbaxy provided outstanding support in the form of govt. approvals, licenses, distribution and supplies. Both the companies had different focus- Lilly was driven by innovation whereas Ranbaxy’s business depended on generics.

Recruitment theme

To manage high prevalent employee turnover; creating un-unionised staff

“Opportunity of a

Lifetime”

Page 8: Eli Lilly-Ranbaxy Alliance

Managing the Alliance (1/2)• Andrew Mascarenhas from Eli Lilly-Managing Director of the JV

• Rajiv Gulati from Ranbaxy-Director of Marketing & Sales of the JV

The Team

• Eli Lilly Ranbaxy sounded foreign enoughJV Name

• Government Approvals, Licenses and Supplies• Distribution NetworkLeveraging Ranbaxy

• Unionized Pharma Industry• Opportunity of a LifetimeHigh Turnover Rate

• MR told Doctors both pros & cons of the drugEli Lilly’s Red Book

• Govt. Regulations-IPR, Pricing• Financing the affiliateChallenges

• Off-Patented Drugs• Patented DrugsMarketing Strategy

Page 9: Eli Lilly-Ranbaxy Alliance

Managing the Alliance (2/2)

Alliance Manager Top Management

Establish the right tone• Andrew and Rajiv had a strong and cohesive

relationshipMonitor Partner Contributions• Used Ranbaxy’s name for getting licenses• Lilly handled human resources• Code of ethical conduct – Red book• Lilly handled marketing activities and Ranbaxy

handled logistics and distribution

Recognize the importance of information flows• Ranbaxy provided market information• Lilly decided which products to sell

Maintain links at all levels• Lilly and Ranbaxy allowed free interaction among all

levels

Exploring the dimensions of executive participation• Organizational changes with executives from Lilly

and Ranbaxy taking over ELR

Fostering organizational reciprocity• Ranbaxy and Lilly’s vision were in sync and both

respected each other

Exploring new strategic opportunities• Generic drugs agreement

Resource allocation• 50-50 distribution agreement (informal)

Catalyzing cultural change• Brought in executives to bring is SOP and provide

career development scope

Page 10: Eli Lilly-Ranbaxy Alliance

Evaluating the JV - Possible Ways out

Grow it

Ranbaxy uses

employees of Lilly’s R&D team

Lilly uses Ranbaxy’

s distributi

on channel

Fix it

Ranbaxy goes

back to focusing

on generics

Lilly introduce

s more products

in the market

Lilly puts in more

capital to cover

Ranbaxy’s losses

by buying more

stake in the JV

Exit

Ranbaxy buy’s out

Lilly’s stake/Lilly buy’s

out Ranbaxy’s stake

Both find new

partners

Page 11: Eli Lilly-Ranbaxy Alliance

A Few Questions remain…

Opportunities of Indian Market•Low costs•Favourable legislation

Constraints in US Market•Higher costs of regulatory compliance

•Threat from generics

Ranbaxy as a partner Second largest manufacturer with 15%

domestic market share Established distribution network Second largest exporter, with countries

like Russia (Eli Lilly aspiration) 50-75% lower capital costs compared to

U.S. Low cost basic research and clinical trail

opportunities

1. Was this the right strategy for Eli Lilly? 2. Performance and mutual learning from JV

Profitable to both partners

Eli Lilly

• Low cost IPI’s• Low cost clinical

trials• Russia export

opportunity• Market entry under

Ranbaxy brand ageis

• Market knowledge

Ranbaxy

• Capabilities in cardio-vascular, anti-infectives and anti-cancer drugs

• Good reputation from sales force ethics practises of Eli Lilly

• Access to international markets including U.S.

Page 12: Eli Lilly-Ranbaxy Alliance

Role of the leaders of the JV

Andrew Mascarenhas

Initial coordination challenges

Setting targetsRecruiting & tackling

attrition

IN & OUT licensing of products and technologies

Training program to spread values & code

of conduct

Chris Shaw

Stabilizing the fast growing organisation

Focus on building systems & processes,

developed SOP’sStreamline the

marketing & sales activities

Rajiv Gulati

New institutional environment

Re-evaluate JV strategy

Staff enlargementMedical and

regulatory unit developed to handle

product approval processes

Page 13: Eli Lilly-Ranbaxy Alliance

Alliance Evolution Framework

PRE JV Market

Import substitution regime

Process patents, price controls & profit

limited to 6% sales

Multinationals at a disadvantage, bulk

production of copied drugs.

1993 Frenzied Market

Regulations relaxed, majority foreign stake

allowed (51%)

Focus on market access

Government restrictions on pricing

Building the sales force: unionization, attrition and

Red Book code

Formation of JV

2005 Turbulent

MarketRegulation liberalized allowing fully owned

subsidiaries

Focus on growth & profitability

Many global players in market, emergence of

cross border M&A

Limited Ranbaxy role & cash flow constraints

Dissolution of JV

Post JV Mature Market

Active market for corporate

control

Market integration focus to improve performance via optimization of global business

system (outsourcing)

Page 14: Eli Lilly-Ranbaxy Alliance

Global Pharmaceutical Industry: The Past and the Future

2010E 2015E 2020E-25

125

275

425

308 335 335

205 205 195154

303

487

188238

300

US

EU

EM

Other

Rank in

2012Company

Rank in

2001

Rank in 1992

1 Pfizer 1 11

2 Novartis 8 -

3 Merck 3 2

4 Sanofi 16 -

5 GlaxoSmithKline 2 1*

6 AstraZeneca 4 -

7 Johnson & Johnson 7 13

8 Abbott Laboratories 14 15

9 Eli Lilly & Co. 10 12

10 Teva - -

11Bristol-Myers

Squibb 5 3

12 Takeda 15 -

13Boehringer-Ingelheim 17 -

14 Bayer 18 9

15 Astellas - -

16 Daiichi-Sankyo - -

17 Otsuka - -

18 Gilead - -

19 Mylan - -

20 EISAI - -

Bases of

competitiv

e adva

ntage today

Development resources, sales and marketingGlobal high prices, restricting accessMultiple competitors in major therapeutic areas, scale permitting successMulti-billion dollar drug revenues covering high fixed costsEnd to end operational capabilities for “self-sufficiency” strategyAcquisition of technologies and products to augment product pipelineFocus on mature Western Markets

Bases of

competiti

ve advantage in

2020

Value of products and services, distribution strengthPricing based on ability to pay driving volume upliftFewer competitors in a broader range of diseasesMore products with lower revenues and lower costsSignificant outsourcing of operations such as manufacturing and support facilitiesGreater collaboration with academia, biotech and peers Focus on Emerging Markets

Major Pharmaceutical Markets in the

world

Distinct shift towards Emerging Markets

Page 15: Eli Lilly-Ranbaxy Alliance

Alliances and New trends in Indian Pharmaceutical Sector

Domestic Indian Market (Market

Access)

Bayer(German) & Zydus Cadila,

50:50 JV,

Eli Lilly(U.S.) & Lupin

Novartis(Switzerland) & USV Ltd.

Omega Pharma(Belgium) &

Modi-Mundi Pharma group

Global Market (Sourcing)

GSK(U.K.) & Dr. Reddy

Pfizer(U.S.) & Aurobindo

Pharma

Merck(German) & Sun

Pharmaceuticals

Global Market (R&D)

Glenmark & Sanofi Aventis(French)

Endo Pharmaceuticals (U.S.) &

Jubilant

Contract Research and Manufacturing Services (CRAMS)

• Outsourcing of research & manufacturing

• Fastest growing segment in Pharmaceuticals

Collaboration Business Models

• Payment / royalty milestone• Co-development• In-license of compounds from

Indian companies• Out-license of research programs

to Indian companies with buybacks at predefined stages

US-FDA Approved plants

India had the largest number of US-FDA approved plants outside U.S.

Page 16: Eli Lilly-Ranbaxy Alliance

THANK YOU