Eli Lilly Case

April 30, 2017/ Free Papers/ 0 comments

Competing through Strategy Case: Eli Lilly in India: Rethinking the Joint Ventures Strategy I. Brief Summary Global pharmaceuticals had presence in India since early 80’s and it was not until 1993 that Eli Lilly International decided to establish a Joint Venture with India’s second largest laboratory and exporter, Ranbaxy. This move happened in a very challenging context as both companies have very different profiles and backgrounds. The main differential characteristic was the nature of their products.

While Ranbaxy was focused on generics and in other intermediate products, Eli Lilly International core business was the commercialization and development of new drugs through an aggressive R&D strategy. The trigger for Eli Lilly to start thinking of going into India was the liberalization process in pharmaceutical markets as a consequence of the change of the economic model from import-substitution to an export-oriented. The foreign ownership was allowed to be 51% (rose from 30%) and additional free market conditions were expected for the coming years.

Despite this trend, there were many restrictions that Eli Lilly would have faced if they did not count with a local partner. These include access to government pharmaceutical and health relevant authorities, an adequate logistics and distribution system, and manufacturing facilities. For Ranbaxy, the main objective was to gain additional market share and increase in sales. The Joint Venture was established, and worked through the years with good results. Ranbaxy (including Eli Lilly) went from the 3rd place in market share in 1996, to the first place in year 2000.

Year 2001 brought many variables into the Joint Venture situation. The most important is that government liberalization process continued in a positive trend and at that point of time, foreign investors were allowed to own the 100% of any company in the pharmaceutical industry. This structural change was combined with a relative illiquid situation for Ranbaxy in terms of available cash for additional investments and a need to do so because of many acquisition processes in new markets.

Eli Lilly was analyzing how to manage their position in India from 2001 and for the future. Property Rights regulation will recognize patents for many Eli Lilly products and hence the market opportunities could increase for them. The options are to stay/go in India; continue/dissolve the JV; or to buy/sell participation in the JV. From additional information we know that Eli Lilly bought Ranbaxy’s stake in the JV for USD 17mm when some previous analysis gave an indicative value of USD 70m.

This reflected a better negotiation position due to Ranbaxy’s needs for cash to continue other projects. About the future of Eli Lilly India, Mr. Rajiv Gulati, Managing Director for India’s Operations, told the press that they will focus on clinical trials of drugs, that they will execute a long-term business and strategic plans, and that they will keep Ranbaxy as a supplier as they will not manufacture products locally. II. Introduction In the early days of independence, India had no capabilities to produce pharmaceuticals and mainly imported them.

This lack of proper chemical industry and the Patent and Designs Act of 1911, almost an extension of the British colonial rule, gave enough incentives for the multinational laboratories to begin exporting drugs from their countries of origin to India. In the decade of 1970s two key changes defined the legal framework under which the pharmaceutical industry would rule its becoming growth: the Patents Act and the Drug Price Control Order. Both encourage local firms to simply copy the drugs from international laboratories by developing their so-called “own” processes.

In the other hand, multinational companies began moving out of India. Just before the end of the century, India began embracing globalization, encouraging foreign direct investments and export driven industries within bigger foreign company ownership. In this context, two complimentary pharmaceutical companies: Eli Lilly and Ranbaxy begun exploring a partnership. Both had very close foundations and perspectives toward the industry’s future, but very different core businesses at the time of the Joint Venture.

Eli Lilly was driven by excellence in management and R&D while Ranbaxy was convinced that to mature and really succeed globally the Indian pharmaceutical industry required intellectual property enforcement and that is why at the time of the venture Ranbaxy was completely focused in generics production and sales. The JV began its operations in 1993. It was thought to mix active ingredients imported from Lilly with Ranbaxy’s packages and distribution capacities.

Success took a while to get but the strong and close relation between the designated top executives from Lilly and Ranbaxy gave a solid reference point for the blooming company. Nevertheless, product and marketing strategies had to be adopted to suit the market conditions. The new millennium brought new trends in the industry. As it got more mature, M&A began rapidly driving the pharmaceuticals to concentrate market share and focus on high-margin preparations.

In this new environment, Ranbaxy Laboratories announced its intentions to become a research-based global company and began buying aggressively two other laboratories in order to reach bigger economies of scale in their generics division and to strengthen its R&D capacities. Along the millennium, some deep regulatory changes were seen in India: signature of the GATT and entry to the WTO, allowance of 100 percent of FDI into drugs industry, and expected further changes in the government guidelines and price controls.

Within these deep regulatory changes, would the JV still have any sense and represent any benefits for either of its partners? III. Strategic Statements As we have reviewed in the course, as companies become global they need to keep creating value or appropriating value as they expand and at the same time keep protecting potential profits from the threats of competitors or from the bargaining power of suppliers, customers and government. Sometimes due to costs, product life-cycles or barriers to enter new markets, in order to keep growing and increasing sales, companies had to build collaborative relationships with other firms.

This is the case of Eli Lilly and Ranbaxy in India. Government restrictions and power of competitors and suppliers moved Eli Lilly to sign a joint venture with local Ranbaxy in order to enter the Indian market in 1993. Joint Venture Eli Lilly Ranbaxy Strategic Purposes: * The decision to form a strategic Joint Venture was dictated by the conditions of the US market and opportunities of the Indian market. Costlier manufacturing practices due to strict governmental control, soaring prices in 1990s, invasion of cheap generics to the USA market as opposed to low osts in India and new regulations that opened Indian market to foreign investments (up to 51%) created tempting conditions to enter one of the emerging huge markets of the world. * Eli Lilly alliance with Ranbaxy was a smart strategy for Eli Lilly to establish its presence in India. Ranbaxy was the second largest manufacturing company of bulk drugs and generics with domestic market share of 15% in India with established distribution network and the second largest exporter to different countries, including Russia (which Eli Lilly was attempting to reach). There was also possibility to conduct cheap clinical trials in India. * In the chart below we have the four basic purposes that international joint ventures used to achieve. At the beginning of the Joint Venture, the main objective was to introduce Eli Lilly’s products into the Indian market, so we have that this joint venture aim was to take existing products to foreign markets. * One of the most important problems for the joint venture was the weak patent laws in India, which prevented the American partner from sharing its research expertise. Eli Lilly obviously, realized the benefits of an arrangement with Ranbaxy in sourcing low-cost basic research from India. * Eli Lilly, like all firms competing in international markets, must focus on core competencies and ensure their focus is aligned with their company objectives. Often, firms lose-sight of these objectives and fall victim to unprofitable projects. * Another important thing to take in consideration to form the joint venture was the value of Ranbaxy knowledge in local market, the partners’ contributions and the transparency of the local environment.

Through the joint venture, Eli Lilly merged the main strengths of their value chains, creating a new one the Eli Lilly Ranbaxy Value Chain: Value Chain of the JV ELR In the value chain graph, we have tried to identify the activities that were more influenced by either Eli Lilly or by Ranbaxy. As we are aware, Lilly’s culture and its R&D focus played a strategic role in the JV. As for the procurement Ranbaxy was the main supplier and the one who knew the market and how to interact in it.

It was not Eli Lilly’s intention to start a manufacturing plant in India, so the operation and distribution activities were mainly Ranbaxy’s responsibility. Ranbaxy supplied certain products of its own portfolio to the joint venture and formulated and finished some of Lilly’s products locally. Even though Ranbaxy already had the market knowledge and good relationships with the medical staff of India (doctors were the main “clients”, not as final consumer but as the ones who influenced the shoppers), Lilly’s marketing and sales strategies were fundamental to achieve success.

The JV positioned as a leader in the Indian market and sales kept growing. But as we live in a world that keeps changing, the industry kept changing and the government kept opening the market. In 2001, Indian Ranbaxy had also consolidated its global position with heavy investments throughout the world and was looking to keep doing so. On the other hand, market conditions have loosed the path for Eli Lilly to have an Indian subsidiary of his own (100%). As we have reviewed on the course material, new alliances are created for short durations.

It is responsibility of the management to decide whether to keep it, change it or finish it. It must exist as long as it is the company’s best option to exist and grow. In order to have all the information needed to make a decision, we will use some of Porter’s tools to analyze the position of Eli Lilly in 2001: Competitive Forces Model: Eli Lilly The five forces Model of Porter helps us to identify the attractiveness of the industry structure, in this case, the pharmaceutical industry as for Eli Lilly: * Rivalry among existing firms: fierce competition.

Leaders of the pharmaceutical industry were already in India and changes in the market will intensify the rivalry with companies trying to consolidate and achieve economies of scale. Competitors will evaluate launching their star products as the IPRs start to protect them. * Threat of potential entrants: the new set of rules will encourage new competitors to enter the market. IPRs adoption will encourage the entrance of more competitors. * Threat of substitute products: the growing generic market. * Bargaining power of suppliers: Ranbaxy was the main supplier of Eli Lilly nd by ending the JV, the cost efficiency could be damaged. There exist other suppliers but conditions will not be as favorable as with the JV. * Bargaining power of buyers: Government responds to consumers’ demand of low cost products generating regulations for price control. High demand of pharmaceutical products. With the previous analysis, we can now elaborate the SWOT analysis for Eli Lilly: SWOT for Eli Lilly IV. Possible Solutions and Evaluation Solution A: Eli Lilly and Ranbaxy decide to continue with the JV.

Although they will keep together with each other, they must redesign the JVs objectives, strategies and company policies. After working together for almost ten years, both companies have a lot in stake: the JV is profitable, holds a very interesting market share, has build some brand recognition and company goodwill in the local market and has a well selling products portfolio. Internally also the management has achieved to form a competitive and well prepared sales force, along with a medical and regulatory unit, all which helped the company to record excellent growing rates for a couple of years (1998 to 2001).

We should also take into consideration the velocity within the Indian pharmaceutical industry was growing, both in sales and competitiveness. As most of the maturity processes in any given industry, mergers and acquisitions began taking place aggressively. The development of the market was accompanied by strengthening the IPR and FDI regulations, which at the end pursue to encourage the industries’ growth. With all the previous being said, we think that they both have to talk and negotiate their ground rules between this new market framework. For example, f they both intend to maintain their stock participation in the JV, Ranbaxy should slow down with its buyouts and other JVs. Another thing would be their strategies. Would Lilly keep importing bulk active ingredients rather than producing them locally? One last thing, besides that Lilly decided not to get into the generics industry in the mid-1990s, would they consider to do it since their partner was still heavily focused in that market? At the end all the analysis will lie in the “costs vs benefits” output that the topics that we have discussed earlier will have.

What would be more expensive, to stay in the JV or to get rid of it and begin operations somewhere else? Solution B: Eli Lilly decides to continue the JV with a new partner. Ranbaxy sells its stake in the joint venture to this new partner. In this possible option, Eli Lilly’s top managers have to decide if they want to continue the JV with a new partner or not because there were rumors within the industry that Ranbaxy wants to leave the JV, sell its stake and invest the cash in its growing portfolio of generics manufacturing business in international markets.

In this context, since India recognized patent protection in 2005, many Indian pharmaceutical companies were keen to align with multinationals and there were also many companies that offered to buy Ranbaxy’s stake in the JV, so Eli Lilly has to evaluate the possible new partner and decided if this new partner fits the Eli Lilly’s strategies, goals and brings an important value to the JV operations. In this case, Ranbaxy provided manufacturing and logistics support to the JV, so breaking up with Ranbaxy would require a significant amount of renegotiations and mean looses in this strategic part of the chain value.

For Eli Lilly, India is an important market especially after patent protection in 2005, they believe that if a partner is what they need to succeed, they should go with a partner, but if it does not, they should have the flexibility to reconsider. We believe this option would be a good one but the most important thing to consider in this option is if the new partner would fit the Eli Lilly’s main goal and culture or not. Solution C: Eli Lilly decides to end the JV and leave India. They might decide to start operations or another JV in some other part of the world.

Top management of Eli Lilly might have evaluated the possibility to leave India. As we have shown in the Five Forces model analysis, the rivalry among competitors in the Indian market was fierce and was about to become worse. Furthermore, considering another partner involves the risks of competitive collaboration, such as having asymmetrical benefits (the new partner could strengthen itself and become a global competitor as Ranbaxy wanted to) and the setting of the boundaries plus the establishment of the culture would be an exhausting process.

The new IPR regulation will allow Eli Lilly to launch its top products but that will mean sharing strategic information which could be also negative. All of these arguments support the idea of ending the JV and refusing to operate with a new partner. On the other hand, Eli Lilly has gained a lot since it entered the Indian market in 1993. The JV results are extremely positive and the company has grown with Eli Lilly’s strong set of values and beliefs. The market recognizes the company for its ethical behavior and it is always good associated.

Eli Lilly has now a good knowledge of the market and the environment, leaving could mean losing all that have been invested in that area and the position and financial results that are being achieved nowadays to start a new subsidiary in a new market (say China) where the job has to be done all over again. We believe it would be a wrong decision to leave India and miss all that have been earned. Solution D: Eli Lilly decides to buy Ranbaxy’s stake in the JV Company. As we stated before, Eli Lilly has already pass through the whole learning curve with Ranbaxy since 1993.

The JV has market recognition and a developed structure in terms of human resources and management. But the advantages of being associated with Ranbaxy had decreased as the Indian government has continued a progressive pharmaceutical market liberalization and openness to foreign investments. They also had learned about market behavior and logistics in India and developed a management team that can handle the business future plans. At that moment they have an own sale force and also learned how to cover Indian domestic demand.

For all the reasons above, the JV is already an independent and successful entity and a perfect platform for Eli Lilly future development in India. From a business opportunity point of view, Ranbaxy is now focused on their R&D development and expansion to other markets and in that sense they need funds to continue with this strategy. This is a perfect scenario for Eli Lilly to leverage on this situation and get not only the full JV ownership, but to keep many advantages of having a commercial relationship with Ranbaxy as a supplier.

The Procurement aspects of the Company are not only provided by Ranbaxy at the moment of analysis but by local JV personnel. We do believe that given the future market perspectives, the alternative of buying Ranbaxy stake at the company and continue with Ranbaxy as a supplier would be the best option. V. Solution After analyzing the alternatives we have come up with, we have decided that the best alternative is the alternative D: Eli Lilly decides to buy Ranbaxy’s stake in the JV Company.

In some way, this solution implies the dissolution of the alliance between Eli Lilly and Ranbaxy, but in any way a failure of the Joint Venture. In 1993, when the JV was formed, market, regulatory and industry conditions were totally different than in 2001. Both companies learned from each other and now are both engaged in different projects and long-term plans. Eli Lilly obtained capabilities at operations, logistics and necessary firm structure to run a pharmaceutical business in India, while Ranbaxy learned how to manage marketing, sales and in some way n R&D strategy. From the financial point of view, there is a perfect opportunity for Eli Lilly to take the 100% of the company for much less than its calculated value of US$ 70 million. The leverage tools would been Ranbaxy’s funding needs for their new business units and new R&D projects, and a high importance on continuing being a supplier for a Company that has the biggest market share in India. This all based on Eli Lilly strategy of not having manufacturing facilities yet.

It is important to remark that the dynamics on Ranbaxy-Eli Lilly relationship was driven by market and regulatory conditions. In this sense, and considering that in 2005 the property rights in India will protect drug patents, it is possible that in the near future the nature of Eli Lilly India will keep evolving and perhaps new products will be distributed and manufacturing facilities will be needed. Hence, Ranbaxy should consider this supplier contract a temporal status and worked on other alliances or business lines.

From the firm structure point of view, the JV has already developed the necessary platform to run the business in India, and the Organizational culture and values are strongly internalized by the entire corporation. This is reflected in a corporate spirit including People, Attitude, Team awareness and Excellence. To start a new JV with a new partner seems too risky and demanding. Finally, we recommend buying the stake of Ranbaxy and redesigning the long-term goals of the Company and replicate this learning in other emerging markets. It might be extremely interesting to reach other high growing markets as China.

Regulatory conditions and property rights will keep being key for this business and in that sense will drive future decisions. For example, the viability of having manufacturing facilities or having R&D units locally because of cost efficiency. VI. Conclusions * The Eli Lilly Ranbaxy was a successful alliance because both companies got engaged in the partnership in an integrative way. Both contributed with its core competences and built a successful business by engaging the people and remaining flexible in the process of integration. From the beginning both companies set the boundaries of the structure, the collaboration and of the information flows correctly. The JV strengthened both companies and helped them to grow: Ranbaxy consolidated its globalization with the management (marketing strategies, R&D focus) and cultural learnings and Eli Lilly was able to enter the Indian market, get established, known and familiar in the environment. * In this case, the changing legal environment brought the challenge to Eli Lilly and Ranbaxy to review and re-evaluate their joint venture alliance.

In a strategic alliance such as a Joint Venture, is very important to considerate the changes in social, legal and culture environment and how it affects the alliance goals. * Many large companies which compete in international markets and used the Joint Venture alliance to introduce their products in other markets have to focus on core competencies and ensure their focus is aligned with their company objectives. Otherwise, firms lose-sight of these objectives and fall victim to unprofitable projects. In Joint Venture alliances, partnership is not always a good thing or bad thing because it depends on the agreements between those companies. If they have same ideas and development to achieve, they can support each other to improve the business. In contrast, when each company tries to reach their own target or go alone with their strategies, they will increase conflicts between their relationships. They, hence, might break up their joint. * The key of success for alliances is, not only recognize when to get in, but mainly be capable to identify the best time to end it.

New forms of alliances are forged for short durations and both partners in this case, knew it and had good results. * Before making any decision and especially when it is about alliances, it is fundamental to have a clear view of the current situation of the company, its internal and external environment and all the forces that will be influencing its performance. Therefore, tools like the Value Chain, the SWOT matrix, the five forces model and others, are very useful to make the right choices.

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