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 .

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