ELI LILLY IN INDIA
RETHINKING THE JOINT VENTURE STRATEGY
Abhay Kishore – 01
Abhishek Kunal – 05
Anil Kumar Jadli – 11
J.Harish – 25
Khushal Malik – 28
Sharad Singh – 49
PHARMACEUTICAL INDUSTRY – Global Trend
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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:
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Food and Drug Administration (FDA) – USA,
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CPMP – Europe
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MHW – Japan
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DPCO & Indian Patent Act - India
North America
8%
12%
Europe
38%
Asia
18%
Japan
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Size of industry : USD 960 billion in 2012.
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Few Firms control entire market (Oligopoly).
• 4 Firms – Control 20% ,
• 20 Firms – 50-60%,
• 50 Firms – 65-75%
24%
ROW
PHARMACEUTICAL INDUSTRY – Global Trend
• Covered the chemical
substance itself
• Offered typically 20 years
of protection
• Usually a lag time of 1012 years by the time the
patent was obtained and
the launch date
• Covered the method of
processing or
manufacturing the
product
• Very little protection
because it was easy to
slightly modify the
process
Global Issues in Pharma Sector
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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.
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Parallel Trade: an outside company sells a patented product in a market not
designated to sell the drug.
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Independent firm exploited parallel trade by using the differentials in price across
various countries.
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Generic Drugs: unbranded drugs of comparable efficacy available at
fractional cost of branded product.
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Posed as major challenge for pricing power of large pharma companies.
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No additional expense for drug R&D of new compounds.
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Generic companies made money by copying the products discovered & developed
by other major pharmaceuticals companies.
Issues in Indian Pharma Sector
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Initially country had no indigenous production capability & was totally
dependent on imports.
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Post independence HAL (promoted by WHO ) & IDPL (Russian assistance) were
established in 1954 & 1961 respectively.
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Indian Patent Act was passed in 1970, it abolished Product patent & permitted
process patent for 5-7 years.
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Drug Price Control Order (DPCO) instituted price control by which govt.
stipulated prices for all the drugs.
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Indian drug prices hovered around 5%-20% of U.S. prices due to these.
Prime minister 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.”
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In 1990s , post globalisation, FDI upto 51% (up from 40%) was allowed in Drugs
& Pharmaceuticals industries.
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A suitable Environment for entry of Eli Lilly entry into India.
Eli Lilly & Company
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Founded in 1876 with $1400 and 4 employees
Chairman Dick Wood decided to take the company global in the
mid-1980s
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By 1992, Lilly manufactured in 25 countries and sold in more
than 130 countries.
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Gerhard Mayr, head Lily International wanted to expand
operation in Asia including India due to :
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Opening of market for foreign investment
Opportunity for clinical testing
Ranbaxy Laboratories Ltd
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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.
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Had a domestic market share of 15% (1996).
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.
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It had presence in 47 markets outside India, mainly through
exports.
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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 signaling
an intention to sell its stake” (p. 229)
 Lilly’s product portfolio for India is limited
 ELR JV depends for manufacturing and
distribution on Ranbaxy
 India: Healthcare expenditures in India are
rising; Increasing demand, improving regulatory
framework, better infrastructure; WTO
membership and resulting change in ownership
requirements, trade, IPR/patent protections
 Industry: Slowdown in growth (price
competition, shift in demand, entry of large
competitors); Internal consolidation to achieve
synergies and economies of scale; Increasing
rivalry and fierce competition
Strategic Objectives
 Take advantage of the opportunities
present and developing in the Indian market
 Emphasis on emerging markets (such as
India) to manage company growth
 Maximize returns and achieve long-term
sustainability
 Shape opinions – be a driving force in the
industry
Porter’s 5 Forces Analysis
Barriers to Entry are high:
Threat of
New
Entrants
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)
•Switching costs depend on input
type
Bargaining
power of
Suppliers
Threat of Substitution is medium:
Competitive
Rivalry
within
Industry
Threat of
Substitutes
•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
Bargaining
power of
customers
•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
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
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
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
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
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
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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.
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.
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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.
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Ranbaxy was driven by the generics business, Lilly was driven by
innovation and discovery
Mutual Advantages to JV Partners – Complimenting
Eli Lilly
Ranbaxy
 Eli Lilly got access to
distribution network in India.
 Lilly’s product portfolio was
unknown to Indian physicians
which got accepted due to JV.
 Eli Lilly built its brand in India.
 Ranbaxy helped JV in getting
govt. approvals, licenses,
distribution & supply.
 Eli Lilly built its production
facility in India, gained economy
of scale.
 JV offered life time association
to new employees to counter
employee turn over.
 Lilly’s training program was
made available to Ranbaxy.
 Technical learning for
Ranbaxy.
 Ranbaxy learned global HR
practices about non-unionised
workforce.
Why it worked !
Cultural Fit
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Andrew Mascarenhas of Lilly and Rajiv Gulati of Ranbaxy were put in
charge, shared a good rapport.
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Able to see eye to eye on most of the issues.
Both companies had commonality on following:
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High ethical standards, honesty and integrity,
Technology & Innovation,
Concern for employees,
Responsible corporate citizens.
No cannibalisation of each other’s employees
ALLIANCE MANAGEMENT
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Clarity on Governance structure,
Selection of alliance managers,
exit terms & conditions outlined before hand
Alliance Performance …..
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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
form of medical information to physician
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In 1996, JV achieved break even point & became profitable.
New initiative like Medical U regulatory unit which handled product approval
process with govt.
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By 2001, JV surpassed the average growth rate of Indian pharmaceutical
industry.
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Sales increased by around 57% in 2000-01 & PAT increase of 103% during same
period.
Changing World Order …..
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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.
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Partnership on pharmaceutical & biotechnology companies was
growing rapidly.
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Increased challenges of
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increased R&D cost and development,
Approval time &
Competition from generics.
Changing World Order …..
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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.
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Partnership on pharmaceutical & biotechnology companies was growing
rapidly.
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Increased challenges of
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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.
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Indian govt. decision to allow 100% FDI in Drug and Pharmaceutical
industries in 2001.
Change in Order …..
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Eli Lilly had established foothold in Indian market & expanded their
network.
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Ranbaxy formulated a new mission to be a Research based
International Pharmaceuticals Company.
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Ranbaxy started forming JVs for developed market for US, Canada
& Ireland.
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Due to increased competition in India JV might be less profitable
than other markets.
Strategy Alternatives
Strategy A
Strategy B
Strategy C
Restructure - renegotiate JV
with Ranbaxy
• Pro: maintain successful JV;
retain access Ranbaxy’s
manufacturing and
distribution; well established
relationship
Form a new JV - find a new
partner
• Pro: cooperative partner –
support; potential access to
manufacturing and
distribution; share risk and
burdens
• 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
• Con: difficult to find suitable
partner; negotiations take
time; Ranbaxy may transfer
shares without concern fro
company fit; JV
purpose/mission?
Terminate JV – establish
subsidiary
• Pro: India offers many
opportunities; decisions can be
made with the interest of Lilly
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; lack of
manufacturing and
distribution channels
Evaluating Strategic Options …..
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Eli Lilly had established foothold in Indian market & expanded their
network.
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Ranbaxy formulated a new mission to be a Research based
International Pharmaceuticals Company.
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Ranbaxy started forming JVs for developed market for US, Canada
& Ireland.
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Due to increased competition in India JV might be less profitable
than other markets.
Conclusion: Actions to be taken
•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.
•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 you