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ELI IN INDIA: RETHINKING THE JOINT VENTURE
Nikhil Celly prepared this case under the supervision of Professors Charles Dhanaraj and Paul W. Beamish
solely to provide material for class discussion. The authors do not intend to illustrate either effective or
ineffective handling of a managerial situation. The authors may have disguised certain names and other
identifying information to protect confidentiality.
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Version: (A) 2008-09-05
In August 2001, Dr. Lorenzo Tallarigo, president of Intercontinental Operations,
Eli Lilly and Company (Lilly), a leading pharmaceutical firm based in the United
States, was getting ready for a meeting in New York, with D. S. Brar, chairman
and chief executive officer (CEO) of Ranbaxy Laboratories Limited (Ranbaxy),
India. Lilly and Ranbaxy had started a joint venture (JV) in India, Eli LillyRanbaxy Private Limited (ELR) that was incorporated in March 1993. The JV had
steadily grown to a full-fledged organization employing more than 500 people in
2001. However, in recent months Lilly was re-evaluating the directions for the JV,
with Ranbaxy signaling an intention to sell its stake. Tallarigo was scheduled to
meet with Brar to decide on the next steps.
THE GLOBAL PHARMACEUTICAL INDUSTRY IN THE 1990S
The pharmaceutical industry had come about through both forward integration
from the manufacture of organic chemicals and a backward integration from
druggist-supply houses. The industrys rapid growth was aided by increasing
worldwide incomes and a universal demand for better health care; however, most
of the world market for pharmaceuticals was concentrated in North America,
Europe and Japan. Typically, the largest four firms claimed 20 per cent of sales,
the top 20 firms 50 per cent to 60 per cent and the 50 largest companies accounted
for 65 per cent to 75 per cent of sales (see Exhibit 1). Drug discovery was an
expensive process, with leading firms spending more than 20 per cent of their sales
on research and development (R&D). Developing a drug, from discovery to
launch in a major market, took 10 to 12 years and typically cost US$500 million to
US$800 million (in 1992). Bulk production of active ingredients was the norm,
along with the ability to decentralize manufacturing and packaging to adapt to
particular market needs. Marketing was usually equally targeted to physicians and
the paying customers. Increasingly, government agencies, such as Medicare, and
health management organizations (HMOs) in the United States were gaining
influence in the buying processes. In most countries, all activities related to drug
research and manufacturing were strictly controlled by government agencies, such
as the Food and Drug Administration (FDA) in the United States, the Committee
on Proprietary Medicinal Products (CPMP) in Europe, and the Ministry of Health
and Welfare (MHW) in Japan.
Patents were the essential means by which a firm protected its proprietary
knowledge. The safety provided by the patents allowed firms to price their
products appropriately in order to accumulate funds for future research. The basic
reason to patent a new drug was to guarantee the exclusive legal right to profit
from its innovation for a certain number of years, typically 20 years for a product
patent. There was usually a time lag of about eight to 10 years from the time the
patent was obtained and the time of regulatory approval to first launch in the
United States or Europe. Time lags for emerging markets and in Japan were
longer. The product patent covered the chemical substance itself, while a
process patent covered the method of processing or manufacture. Both patents
guaranteed the inventor a 20-year monopoly on the innovation, but the process
patent offered much less protection, since it was fairly easy to modify a chemical
process. It was also very difficult to legally prove that a process patent had been
created to manufacture a product identical to that of a competitor. Most countries
relied solely on process patents until the mid-1950s, although many countries had
since recognized the product patent in law. While companies used the global
market to amortize the huge investments required to produce a new drug, they
were hesitant to invest in countries where the intellectual property regime was
As health-care costs soared in the 1990s, the pharmaceutical industry in developed
countries began coming under increased scrutiny. Although patent protection was
strong in developed countries, there were various types of price controls. Prices
for the same drugs varied between the United States and Canada by a factor of 1.2
to 2.5.1 Parallel trade or trade by independent firms taking advantage of such
differentials represented a serious threat to pharmaceutical suppliers, especially in
Europe. Also, the rise of generics, unbranded drugs of comparable efficacy in
Estimates of industry average wholesale price levels in Europe (with Spanish levels indexed at 100 in
1989) were: Spain 100; Portugal 107; France 113; Italy 118; Belgium 131: United Kingdom 201; The
Netherlands 229; West Germany 251. Source: T. Malnight, Globalization of an Ethnocentric Firm: An
Evolutionary Perspective, Strategic Management Journal, 1995, Vol. 16 p.128.
treating the disease but available at a fraction of the cost of the branded drugs,
were challenging the pricing power of the pharmaceutical companies.
Manufacturers of generic drugs had no expense for drug research and development
of new compounds and only had limited budgets for popularizing the compound
with the medical community. The generic companies made their money by
copying what other pharmaceutical companies discovered, developed and created a
market for. Health management organizations (HMOs) were growing and
consolidating their drug purchases. In the United States, the administration under
President Clinton, which took office in 1992, investigated the possibility of a
comprehensive health plan, which, among other things, would have allowed an
increased use of generics and laid down some form of regulatory pressure on
THE INDIAN PHARMACEUTICAL INDUSTRY IN THE 1990S
Developing countries, such as India, although large by population, were
characterized by low per capita gross domestic product (GDP). Typically,
healthcare expenditures accounted for a very small share of GDP, and health
insurance was not commonly available. The 1990 figures for per capita annual
expenditure on drugs in India were estimated at US$3, compared to US$412 in
Japan, US$222 in Germany and US$191 in the United Kingdom.2 Governments
and large corporations extended health coverage, including prescription drug
coverage, to their workers.
In the years before and following Indias independence in 1947, the country had no
indigenous capability to produce pharmaceuticals, and was dependent on imports.
The Patent and Designs Act of 1911, an extension of the British colonial rule,
enforced adherence to the international patent law, and gave rise to a number of
multinational firms subsidiaries in India, that wanted to import drugs from their
respective countries of origin. Post-independence, the first public sector drug
company, Hindustan Antibiotics Limited (HAL), was established in 1954, with the
help of the World Health Organization, and Indian Drugs and Pharmaceutical
Limited (IDPL) was established in 1961 with the help of the then Soviet Union.
The 1970s saw several changes that would dramatically change the intellectual
property regime and give rise to the emergence of local manufacturing companies.
Two such key changes were the passage of the Patents Act 1970 (effective April
1972) and the Drug Price Control Order (DPCO). The Patents Act in essence
abolished the product patents for all pharmaceutical and agricultural products, and
permitted process patents for five to seven years. The DPCO instituted price
controls, by which a government body stipulated prices for all drugs.
Subsequently, this list was revised in 1987 to 142 drugs (which accounted for 72
per cent of the turnover of the industry). Indian drug prices were estimated to be
Organization of Pharmaceutical Producers of India Report.
five per cent to 20 per cent of the U.S. prices and among the lowest in the world.3
The DPCO also limited profits pharmaceutical companies could earn to
approximately six per cent of sales turnover. Also, the post-manufacturing
expenses were limited to 100 per cent of the production costs. At the World Health
Assembly in 1982 Indira Gandhi, then Prime Minister of India, aptly captured the
national sentiment on the issue in an often-quoted statement:
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.
With the institution of both the DPCO and the 1970 Patent Act, drugs became
available more cheaply, and local firms were encouraged to make copies of drugs
by developing their own processes, leading to bulk drug production. The
profitability was sharply reduced for multinational companies, many of which
began opting out of the Indian market due to the disadvantages they faced from the
local competition. Market share of multinational companies dropped from 80 per
cent in 1970 to 35 per cent in the mid-1990s as those companies exited the market
due to the lack of patent protection in India.
In November 1984, there were changes in the government leadership following
Gandhis assassination. The dawn of the 1990s saw India initiating economic
reform and embracing globalization. Under the leadership of Dr. Manmohan
Singh, then finance minister, the government began the process of liberalization
and moving the economy away from import substitution to an export-driven
economy. Foreign direct investment was encouraged by increasing the maximum
limit of foreign ownership to 51 per cent (from 40 per cent) in the drugs and
pharmaceutical industry (see Exhibit 2). It was in this environment that Eli Lilly
was considering getting involved.
ELI LILLY AND COMPANY
Colonel Eli Lilly founded Eli Lilly and Company in 1876. The company would
become one of the largest pharmaceutical companies in the United States from the
early 1940s until 1985 but it began with just $1,400 and four employees, including
Lillys 14-year-old son. This was accomplished with a company philosophy
grounded in a commitment to scientific and managerial excellence. Over the
years, Eli Lilly discovered, developed, manufactured and sold a broad line of
human health and agricultural products. Research and development was crucial to
Lillys long-term success.
According to a study from Yale University, Ranitidine (300 tabs/10 pack) was priced at Rs18.53,
whereas the U.S. price was 57 times more, and Ciprofloxacin (500 mg/4 pack) was at Rs28.40 in India,
whereas the U.S. price was about 15 times more.
Before 1950, most OUS (a company term for Outside the United States)
activities were export focused. Beginning in the 1950s, Lilly undertook systematic
expansion of its OUS activities, setting up several affiliates overseas. In the mid1980s, under the leadership of then chairman, Dick Wood, Lilly began a
significant move toward global markets. A separate division within the company,
Eli Lilly International Corporation, with responsibility for worldwide marketing of
all its products, took an active role in expanding the OUS operations. By 1992,
Lillys products were manufactured and distributed through 25 countries and sold
in more than 130 countries. The company had emerged as a world leader in oral
and injectable antibiotics and in supplying insulin and related diabetic care
products. In 1992, Lilly International was headed by Sidney Taurel, an MBA from
Columbia University, with work experience in South America and Europe, and
Gerhard Mayr, an MBA from Stanford, with extensive experience in Europe.
Mayr wanted to expand Lillys operations in Asia, where several countries
including India were opening up their markets for foreign investment. Lilly also
saw opportunities to use the world for clinical testing, which would enable it to
move forward faster, as well as shape opinion with leaders in the medical field
around the world; something that would help in Lillys marketing stage.
Ranbaxy began in the 1960s as a family business, but with a visionary
management grew rapidly to emerge as the leading domestic pharmaceutical firm
in India. Under the leadership of Dr. Parvinder Singh, who held a doctoral degree
from the University of Michigan, the firm evolved into a serious research-oriented
firm. Singh, who joined Ranbaxy to assist his father in 1967, rose to become the
joint managing director in 1977, managing director in 1982, and vice-chairman
and managing director in 1987. Singhs visionary management, along with the
operational leadership provided by Brar, who joined the firm in 1977, was
instrumental in turning the family business into a global corporation. In the early
1990s, when almost the entire domestic pharmaceutical industry was opposing a
tough patent regime, Ranbaxy was accepting it as given. Singhs argument was
unique within the industry in India:
The global marketplace calls for a single set of rules; you cannot
have one for the Indian market and the other for the export market.
Tomorrows global battles will be won by product leaders, not
operationally excellent companies. Tomorrows leaders must be
visionaries, whether they belong to the family or not. Our mission
at Ranbaxy is to become a research based international
Quoted in Times of India, June 9, 1999.
By the early 1990s, Ranbaxy grew to become Indias largest manufacturer of bulk
drugs5 and generic drugs, with a domestic market share of 15 per cent (see Exhibit
One of Ranbaxys core competencies was its chemical synthesis capability, but the
company had begun to outsource some bulk drugs in limited quantities. The
company produced pharmaceuticals in four locations in India. The companys
capital costs were typically 50 per cent to 75 per cent lower than those of
comparable U.S. plants and were meant to serve foreign markets in addition to the
Indian market. Foreign markets, especially those in more developed countries,
often had stricter quality control requirements, and such a difference meant that the
manufacturing practices required to compete in those markets appeared to be
costlier from the perspective of less developed markets. Higher prices in other
countries provided the impetus for Ranbaxy to pursue international markets; the
company had a presence in 47 markets outside India, mainly through exports
handled through an international division. Ranbaxys R&D efforts began at the
end of the 1970s; in 1979, the company still had only 12 scientists. As Ranbaxy
entered the international market in the 1980s, R&D was responsible for registering
its products in foreign markets, most of which was directed to process R&D; R&D
expenditures ranged from two per cent to five per cent of the annual sales with
future targets of seven per cent to eight per cent.
THE LILLY RANBAXY JV
Ranbaxy approached Lilly in 1992 to investigate the possibility of supplying
certain active ingredients or sourcing of intermediate products to Lilly in order to
provide low-cost sources of intermediate pharmaceutical ingredients. Lilly had had
earlier relationships with manufacturers in India to produce human or animal
insulin and then export the products to the Soviet Union using the Russia/India
trade route, but those had never developed into on-the-ground relationships within
the Indian market. Ranbaxy was the second largest exporter of all products in
India and the second largest pharmaceutical company in India after Glaxo (a
subsidiary of the U.K.-based firm).
Rajiv Gulati, at that time a general manager of business development and
marketing controller at Ranbaxy, who was instrumental in developing the strategy
for Ranbaxy, recalled:
In the 1980s, many multinational pharmaceutical companies had a
presence in India. Lilly did not. As a result of both the sourcing of
intermediate products as well as the fact that Lilly was one of the
only players not yet in India, we felt that we could use Ranbaxys
knowledge of the market to get our feet on the ground in India.
A bulk drug is an intermediate product that goes into manufacturing of pharmaceutical products.
Ranbaxy would supply certain products to the joint venture from its
own portfolio that were currently being manufactured in India and
then formulate and finish some of Lillys products locally. The joint
venture would buy the active ingredients and Lilly would have
Ranbaxy finish the package and allow the joint venture to sell and
distribute those products.
The first meeting was held at Lillys corporate center in Indianapolis in late 1990.
Present were Ranbaxys senior executives, Dr. Singh, vice-chairman, and D.S.
Brar, chief operating officer (COO), and Lillys senior executives including Gene
Step and Richard Wood, the CEO of Lilly. Rickey Pate, a corporate attorney at Eli
Lilly who was present at the meeting, recalled:
It was a very smooth meeting. We had a lot in common. We both
believed in high ethical standards, in technology and innovation, as
well as in the future of patented products in India. Ranbaxy
executives emphasized their desire to be a responsible corporate
citizen and expressed their concerns for their employees. It was
quite obvious Ranbaxy would be a compatible partner in India.
Lilly decided to form the joint venture in India to focus on marketing of Lillys
drugs there, and a formal JV agreement was signed in November 1992. The newly
created JV was to have an authorized capital of Rs200 million (equivalent of
US$7.1 million), and an initial subscribed equity capital of Rs84 million (US$3
million), with equal contribution from Lilly and Ranbaxy, leading to an equity
ownership of 50 per cent each. The board of directors for the JV would comprise
six directors, three from each company. A management committee was also
created comprising two directors, one from each company, and Lilly retained the
right to appoint the CEO who would be responsible for the day-to-day operations.
The agreement also provided for transfer of shares, in the event any one of the
partners desired to dispose some or its entire share in the company.
In the mid-1990s, Lilly was investigating the possibility of extending its operations
to include generics. Following the launch of the Indian JV, Lilly and Ranbaxy,
entered into two other agreements related to generics, one in India to focus on
manufacturing generics, and the other in the United States to focus on the
marketing of generics. However, within less than a year, Lilly made a strategic
decision not to enter the generics market and the two parties agreed to terminate
the JV agreements related to the generics. Mayr recalled:
At that time we were looking at the Indian market although we did
not have any particular time frame for entry. We particularly liked
Ranbaxy, as we saw an alignment of the broad values. Dr. Singh
had a clear vision of leading Ranbaxy to become an innovation
driven company. And we liked what we saw in them. Of course,
for a time we were looking at the generic business and wondering if
this was something we should be engaged in. Other companies had
separate division for generics and we were evaluating such an idea.
However, we had a pilot program in Holland and that taught us
what it took to be competitive in generics and decided that business
wasnt for us, and so we decided to get out of generics.
By March 1993, Andrew Mascarenhas, an American citizen of Indian origin, who
at the time was the general manager for Lillys Caribbean basin, based in San Juan,
Puerto Rico, was selected to become the managing director of the joint venture.
Rajiv Gulati, who at the time spearheaded the business development and marketing
efforts at Ranbaxy, was chosen as the director of marketing and sales at the JV.
Lilly saw the joint venture as an investment the company needed to
make. At the time India was a country of 800 million people: 200
million to 300 million of them were considered to be within the
countrys middle class that represented the future of India. The
concept of globalization was just taking hold at Lilly. India, along
with China and Russia were seen as markets where Lilly needed to
build a greater presence. Some resistance was met due to the
recognition that a lot of Lillys products were already being sold by
Indian manufacturers due to the lack of patent protection and
intellectual property rights so the question was what products
should we put in there that could be competitive. The products that
were already being manufactured had sufficient capacity; so it was
an issue of trying to leverage the markets in which those products
were sold into.
Lilly was a name that most physicians in India did not recognize
despite its leadership position in the United States, it did not have
any recognition in India. Ranbaxy was the leader within India.
When I was informed that the name of the joint venture was to be
Lilly Ranbaxy, first thing I did was to make sure that the name of
the joint venture was Eli Lilly Ranbaxy and not just Lilly Ranbaxy.
The reason for this was based on my earlier experience in India,
where good quality rightly or wrongly, was associated with
foreign imported goods. Eli Lilly Ranbaxy sounded foreign
Early on, Mascarenhas and Gulati worked on getting the venture up and running
with office space and an employee base. Mascarenhas recalled:
I got a small space within Ranbaxys set-up. We had two tables,
one for Rajiv and the other for me. We had to start from that
infrastructure and move towards building up the organization from
scratch. Rajiv was great to work with and we both were able to see
eye-to-eye on most issues. Dr. Singh was a strong supporter and
the whole of Ranbaxy senior management tried to assist us
whenever we asked for help.
The duo immediately hired a financial analyst, and the team grew from there.
Early on, they hired a medical director, a sales manager and a human resources
manager. The initial team was a good one, but there was enormous pressure and
the group worked seven days a week. Ranbaxys help was used for getting
government approvals, licenses, distribution and supplies. Recalled Gulati:
We used Ranbaxys name for everything. We were new and it was
very difficult for us. We used their distribution network as we did
not have one and Lilly did not want to invest heavily in setting up a
distribution network. We paid Ranbaxy for the service. Ranbaxy
was very helpful.
By the end of 1993, the venture moved to an independent place, began launching
products and employed more than 200 people. Within another year, Mascarenhas
had hired a significant sales force and had recruited medical doctors and financial
people for the regulatory group with assistance from Lillys Geneva office.
Our recruiting theme was Opportunity of a Lifetime i.e., joining a
new company, and to be part of its very foundation. Many who
joined us, especially at senior level, were experienced executives.
By entering this new and untested company, they were really taking
a huge risk with their careers and the lives of their families.
However, the employee turnover in the Indian pharmaceutical industry was very
high. Sandeep Gupta, director of marketing recalled:
Our biggest problem was our high turnover rate. A sales job in the
pharmaceutical industry was not the most sought-after position.
Any university graduate could be employed. The pharmaceutical
industry in India is very unionized. Ranbaxys HR practices were
designed to work with unionized employees. From the very
beginning, we did not want our recruits to join unions. Instead, we
chose to show recruits that they had a career in ELR. When they
joined us as sales graduates they did not just remain at that level.
We took a conscious decision to promote from within the company.
The venture began investing in training and used Lillys training
programs. The programs were customized for Indian conditions, but
retained Lillys values (see Exhibit 4).
Within a year, the venture team began gaining the trust and respect of doctors, due
to the strong values adhered to by Lilly. Mascarenhas described how the venture
fought the Indian stigma:
Lilly has a code of ethical conduct called the Red Book, and the
company did not want to go down the path where it might be
associated with unethical behavior. But Lilly felt Ranbaxy knew
how to do things the right way and that they respected their
employees, which was a very important attribute. So following
Lillys Red Book values, the group told doctors the truth; both the
positive and negative aspects of their drugs. If a salesperson didnt
know answer the to something, they didnt lie or make up
something; they told the doctor they didnt know. No bribes were
given or taken, and it was found that honesty and integrity could
actually be a competitive advantage. Sales people were trained to
offer product information to doctors. The group gradually became
distinguished by this strange behavior.
Recalled Sudhanshu Kamat, controller of finance at ELR:
Lilly from the start treated us as its employees, like all its other
affiliates worldwide. We followed the same systems and processes
that any Lilly affiliate would worldwide.
Much of the success of the joint venture is attributed to the strong and cohesive
working relationship of Mascarenhas and Gulati. Mascarenhas recalled:
We both wanted the venture to be successful. We both had our
identities to the JV, and there was no Ranbaxy versus Lilly politics.
From the very start when we had our office at Ranbaxy premises, I
was invited to dine with their senior management. Even after
moving to our own office, I continued the practice of having lunch
at Ranbaxy HQ on a weekly basis. I think it helped a lot to be
accessible at all times and to build on the personal relationship.
The two companies had very different business focuses. Ranbaxy was a company
driven by the generics business. Lilly, on the other hand, was driven by innovation
Mascarenhas focused his effort on communicating Eli Lillys values to the new
I spent a lot of time communicating Lillys values to newly hired
employees. In the early days, I interviewed our senior applicants
personally. I was present in the two-day training sessions that we
offered for the new employees, where I shared the values of the
company. That was a critical task for me to make sure that the right
foundations were laid down for growth.
The first products that came out of the joint venture were human insulin from Lilly
and several Ranbaxy products; but the team faced constant challenges in dealing
with government regulations on the one hand and financing the affiliate on the
other. There were also cash flow constraints.
The ministry of health provided limitations on Lillys pricing, and even with the
margin the Indian government allowed, most of it went to the wholesalers and the
pharmacies, pursuant to formulas in the Indian ministry of health. Once those
were factored out of the gross margin, achieving profitability was a real challenge,
as some of the biggest obstacles faced were duties imposed by the Indian
government on imports and other regulatory issues. Considering the weak
intellectual property rights regime, Lilly did not want to launch some of its
products, such as its top-seller, Prozac.6 Gulati recalled:
We focused only on those therapeutic areas where Lilly had a
niche. We did not adopt a localization strategy such as the ones
adopted by Pfizer and Glaxo7 that manufactured locally and sold at
local prices. India is a high-volume, low price, low profit market,
but it was a conscious decision by us to operate the way we did. We
wanted to be in the global price band. So, we did not launch
several patented products because generics were selling at 1/60th
Product and marketing strategies had to be adopted to suit the market conditions.
ELRs strategy evolved over the years to focus on two groups of products: one was
off-patent drugs, where Lilly could add substantial value (e.g. Ceclor), and two,
patented drugs, where there existed a significant barrier to entry (e.g. Reopro and
Gemzar). ELR marketed Ceclor, a Ranbaxy manufactured product, but attempted
to add significant value by providing medical information to the physicians and
other unique marketing activities. By the end of 1996, the venture had reached the
break-even and was becoming profitable.
Used as an antidepressant medication.
An industry study by McKinsey found that Glaxo sold 50 per cent of its volume, received three per cent
of revenues and one per cent of profit in India.
The Mid-Term Organizational Changes
Mascarenhas was promoted in 1996 to managing director of Eli Lilly Italy, and
Chris Shaw, a British national, who was then managing the operations in Taiwan,
was assigned to the JV as the new managing director. Also, Gulati, who was
formally a Ranbaxy employee, decided to join Eli Lilly as its employee, and was
assigned to Lillys corporate office in Indianapolis in the Business Development
Infectious Diseases therapeutic division. Chris Shaw recalled:
When I went to India as a British national, I was not sure what sort
of reception I would get, knowing its history. But my family and I
were received very warmly. I found a dynamic team with a strong
sense of values.
Shaw focused on building systems and processes to bring stability to the fastgrowing organization; his own expertise in operations made a significant
contribution during this phase. He hired a senior level manager and created a team
to develop standard operating procedures (SOPs) for ensuring smooth operations.
The product line also expanded. The JV continued to maintain a 50-50 distribution
of products from Lilly and Ranbaxy, although there was no stipulation to maintain
such a ratio. The clinical organization in India was received top-ratings in internal
audits by Lilly, making it suitable for a wider range of clinical trials. Shaw also
streamlined the sales and marketing activities around therapeutic areas to
emphasize and enrich the knowledge capabilities of the companys sales force.
Seeing the rapid change in the environment in India, ELR, with the support of
Mayr, hired the management-consulting firm, McKinsey, to recommend growth
options in India. ELR continued its steady performance with an annualized growth
rate of about eight per cent during the late 1990s.
In 1999, Chris Shaw was assigned to Eli Lillys Polish subsidiary, and Gulati
returned to the ELR as its managing director, following his three-year tenure at
Lillys U.S. operations. Recalled Gulati:
When I joined as MD in 1999, we were growing at eight per cent
and had not added any new employees. I hired 150 people over the
next two years and went about putting systems and processes in
place. When we started in 1993 and during Andrews time, we were
like a grocery shop. Now we needed to be a company. We had to be
a large durable organization and prepare ourselves to go from sales
of US$10 million to sales of US$100 million.
ELR created a medical and regulatory unit, which handled the product approval
processes with government. Das, the chief financial officer (CFO), commented:
We worked together with the government on the regulatory part.
Actually, we did not take shelter under the Ranbaxy name but built
a strong regulatory (medical and corporate affairs) foundation.
By early 2001, the venture was recording an excellent growth rate (see Exhibit 5),
surpassing the average growth rate in the Indian pharmaceutical industry. ELR
had already become the 46th largest pharmaceutical company in India out of
10,000 companies. Several of the multinational subsidiaries, which were started at
the same time as ELR, had either closed down or were in serious trouble. Das
summarized the achievements:
The JV did add some prestige to Ranbaxys efforts as a global
player as the Lilly name had enormous credibility while Lilly
gained the toehold in India. In 10 years we did not have any
cannibalization of each others employees, quite a rare event if you
compare with the other JVs. This helped us build a unique culture
THE NEW WORLD, 2001
The pharmaceutical industry continued to grow through the 1990s. In 2001,
worldwide retail sales were expected to increase 10 per cent to about US$350
billion. The United States was expected to remain the largest and fastest growing
country among the worlds major drug markets over the next three years. There
was a consolidation trend in the industry with ongoing mergers and acquisitions
reshaping the industry. In 1990, the worlds top 10 players accounted for just 28
per cent of the market, while in 2000, the number had risen to 45 per cent and
continued to grow. There was also a trend among leading global pharmaceutical
companies to get back to basics and concentrate on core high-margined
prescription preparations and divest non-core businesses. In addition, the
partnerships between pharmaceutical and biotechnology companies were growing
rapidly. There were a number of challenges, such as escalating R&D costs,
lengthening development and approval times for new products, growing
competition from generics and follow-on products, and rising cost-containment
pressures, particularly with the growing clout of managed care organizations.
By 1995, Lilly had moved up to become the 12th leading pharmaceutical supplier
in the world, sixth in the U.S. market, 17th in Europe and 77th in Japan. Much of
Lillys sales success through the mid-1990s came from its antidepressant drug,
Prozac. But with the wonder drug due to go off patent in 2001, Lilly was
aggressively working on a number of high-potential products. By the beginning of
2001, Lilly was doing business in 151 countries, with its international sales playing
a significant role in the companys success (see Exhibits 6 and 7). Dr. Lorenzo
When I started as the president of the intercontinental operations, I
realized that the world was very different in the 2000s from the
world of 1990s. Particularly there were phenomenal changes in the
markets in India and China. While I firmly believed that the
partnership we had with Ranbaxy was really an excellent one, the
fact that we were facing such a different market in the 21st century
was reason enough to carefully evaluate our strategies in these
Ranbaxy, too, had witnessed changes through the 1990s. Dr. Singh became the
new CEO in 1993 and formulated a new mission for the company: to become a
research-based international pharmaceutical company with $1 billion in sales by
2003. This vision saw Ranbaxy developing new drugs through basic research,
earmarking 20 per cent of the R&D budget for such work. In addition to its joint
venture with Lilly, Ranbaxy made three other manufacturing/marketing
investments in developed markets: a joint venture with Genpharm in Canada ($1.1
million), and the acquisitions of Ohm Labs in the United States ($13.5 million) and
Rima Pharmaceuticals ($8 million) in Ireland. With these deals, Ranbaxy had
manufacturing facilities around the globe. While China and Russia were expected
to remain key foreign markets, Ranbaxy was looking at the United States and the
United Kingdom as its core international markets for the future. In 1999, Dr.
Singh handed over the reins of the company to Brar, and later the same year,
Ranbaxy lost this visionary leader due to an untimely death. Brar continued
Singhs vision to keep Ranbaxy in a leadership position. However, the vast
network of international sales that Ranbaxy had developed created a large financial
burden, depressing the companys 2000 results, and was expected to significantly
affect its cash flow in 2001 (see Exhibit 8). Vinay Kaul, vice-chairman of
Ranbaxy in 2001 and chairman of the board of ELR since 2000, noted:
We have come a long way from where we started. Our role in the
present JV is very limited. We had a smooth relationship and we
have been of significant help to Lilly to establish a foothold in the
market here in India. Also, we have opened up a number of
opportunities for them to expand their network. However, we have
also grown, and we are a global company with presence in a
number of international markets including the United States. We
had to really think if this JV is central to our operations, given that
we have closed down the other two JV agreements that we had with
Lilly on the generics manufacturing. It is common knowledge that
whether we continue as a JV or not, we have created a substantial
value for Lilly.
There were also significant changes in the Indian business environment. India
signed the General Agreement on Tariffs and Trade (GATT) in April 1994 and
became a World Trade Organization (WTO) member in 1995. As per the WTO,
from the year 2005, India would grant product patent recognition to all new
chemical entities (NCEs), i.e., bulk drugs developed from then onward. Also, the
Indian government had made the decision to allow 100 per cent foreign direct
investment into the drugs and pharmaceutical industry in 2001.8 The Indian
pharmaceutical market had grown at an average of 15 per cent through the 1990s,
but the trends indicated a slowdown in growth, partly due to intense price
competition, a shift toward chronic therapies and the entry of large players into the
generic market. India was seeing its own internal consolidation of major
companies that were trying to bring in synergies through economies of scale. The
industry would see more mergers and alliances. And with Indias entry into the
WTO and its agreement to begin patent protection in 2004-2005, competition on
existing and new products was expected to intensify. Government guidelines were
expected to include rationalization of price controls and the encouragement of
more research and development. Recalled Gulati:
The change of institutional environment brought a great promise for
Lilly. India was emerging into a market that had patent protection
and with tremendous potential for adding value in the clinical trials,
an important component in the pharmaceutical industry. In
Ranbaxy, we had a partner with whom we could work very well,
and one which greatly respected Lilly. However, there were
considerable signals from both sides, which were forcing us to
evaluate the strategy.
Dr. Vinod Mattoo, medical director of ELR commented:
We have been able to achieve penetration in key therapeutic areas
of diabetes and oncology. We have created a high caliber, and nonunionized sales force with world-class sales processes. We have
medical infrastructure and expertise to run clinical trials to
international standards. We have been able to provide clinical trial
data to support global registrations, and an organization in place to
maximize returns post-2005.
EVALUATING STRATEGIC OPTIONS
Considering these several developments, Tallarigo suggested a joint task force
comprising senior executives from both companies:
Soon after assuming this role, I visited India in early 2000, and had
the pleasure of meeting Dr. Brar and the senior executives. It was
In order to regulate the parallel activities of a foreign company, which had an ongoing joint venture in
India, the regulations stipulated that the foreign partner must get a No objection letter from its Indian
partner, before setting up a wholly owned subsidiary.
clear to me that both Brar and I were in agreement that we needed
to think carefully how we approached the future. It was there that I
suggested that we create a joint task force to come up with some
options that would help us make a final decision.
A task force was set up with two senior executives from Lillys Asia-Pacific
regional office (based in Singapore) and two senior executives from Ranbaxy. The
task force did not include senior executives of the ELR so as to not distract the
running of the day-to-day operations. Suman Das, the chief financial officer of
ELR, was assigned to support the task force with the needed financial data. The
task force developed several scenarios and presented different options for the
board to consider.
There were rumors within the industry that Ranbaxy expected to divest the JV, and
invest the cash in its growing portfolio of generics manufacturing business in
international markets. There were also several other Indian companies that offered
to buy Ranbaxys stake in the JV. With India recognizing patent protection in
2005, several Indian pharmaceutical companies were keen to align with
multinationals to ensure a pipeline of drugs. Although there were no formal offers
from Ranbaxy, the company was expected to price its stakes as high as US$70
million. One of the industry observers in India commented:
I think it is fair for Ranbaxy to expect a reasonable return for its
investment in the JV, not only the initial capital, but also so much
of its intangibles in the JV. Ranbaxys stock has grown
significantly. Given the critical losses that Ranbaxy has had in
some of its investments abroad, the revenue from this sale may be a
significant boost for Ranbaxys cash flow this year.
Gerhard Mayr, who in 2001, was the executive vice-president and was responsible
for Lillys demand realization around the world, continued to emphasize the
emerging markets in India, China and Eastern Europe. Mayr commented on
India is an important market for us and especially after patent
protection in 2005. Ranbaxy was a wonderful partner and our
relationship with them was outstanding. The other two joint
ventures we initiated with them in the generics did not make sense
to us once we decided to get out of the generics business. We see
India as a good market for Lilly. If a partner is what it takes to
succeed, we should go with a partner. If it does not, we should
have the flexibility to reconsider.
Tallarigo hoped that Brar would be able to provide a clear direction as to the
ventures future. As he prepared for the meeting, he knew the decision was not an
easy one, although he felt confident that the JV was in good shape. While the new
regulations allowed Lilly to operate as a wholly-owned subsidiary in India, the
partnership has been a very positive element in its strategy. Ranbaxy provided
manufacturing and logistics support to the JV, and breaking up the partnership
would require a significant amount of renegotiations. Also, it was not clear what
the financial implications of such a move would be. Although Ranbaxy seemed to
favor a sell-out, Tallarigo thought the price expectations might be beyond what
Lilly was ready to accept. This meeting with Brar should provide clarity on all
WORLD PHARMACEUTICAL SUPPLIERS 1992 AND 2001
Johnson & Johnson
Rhone Poulenc Rorer
* Market Share Reporter, 1993.
** Pharmaceutical Executive, May 2002.
Merck & Co
Johnson & Johnson
INDIA ECONOMY AT A GLANCE
Gross domestic product (GDP) at current market
prices in US$
Consumer price index (June 1982=100) in local
currency, period average
Recorded official unemployment as a percentage
of total labor force
Stock of foreign reserves plus gold (national
Foreign direct investment inflow
(in US$ millions)
United Nations Commission on Trade and Development
1991, 2001 Census of India
* In millions.
Source: The Economist Intelligence Unit.
TOP 20 PHARMACEUTICAL COMPANIES IN INDIA BY SALES
1996 to 2000
Hindustan Ciba Geigy
Dr. Reddy's Labs
* 1996 figures are from ORG, Bombay as reported in Lanjouw, J.O., www.oiprc.ox.ac.uk/EJWP0799.html, NBER working
paper No. 6366.
Source: Report on Pharmaceutical Sector in India, Scope Magazine, September 2001, p.14.
VALUES AT ELI LILLY RANBAXY LIMITED
The people who make up this company are its most valuable assets
Respect for the individual
o Courtesy and politeness at all times
o Sensitivity to other peoples views
o Respect for ALL people regardless of caste, religion, sex or age
Careers NOT jobs
o Emphasis on individuals growth, personal and professional
o Broaden experience via cross-functional moves
The first responsibility of our supervisors is to build men, then medicines
There is very little difference between people. But that difference makes a BIG difference. The little
difference is attitude. The BIG difference is Whether it is POSITIVE or NEGATIVE
Are we part of the PROBLEM or part of the SOLUTION?
None of us is as smart as all of us
Integrity outside the company
a) We should not do anything or be expected to take any action that we would be ashamed
to explain to our family or close friends
b) The red-faced test
c) Integrity can be our biggest competitive advantage
Integrity inside the company
o With one another: openness, honesty
Serving our customers
In whatever we do, we must ask ourselves: how does this serve my customer better?
Nothing is being done today that cannot be done better tomorrow
Become the Industry Standard
In whatever we do, we will do it so well that we become the Industry Standard
ELI LILLY-RANBAXY INDIA FINANCIALS
1998 to 2001
Profit after Tax
No. of Employees
Exchange Rate (Rupees/US$)
Note: Financial year runs from April 1 to March 31.
Source: Company Reports.
1992 to 2000
Research and development expenses
Income from continuing operations before
taxes and extraordinary items
Dividends per share*
Property and equipment
Number of employees*
* Actual value
Source: Company files.
PRODUCT SEGMENT INFORMATION
Lilly and Ranbaxy
1996 and 2000
Eli Lilly in 2000
Eli Lilly in 1996
Exhibit 7 (continued)
Ranbaxy in 2000
Ranbaxy in 1996
1992 to 2000
Profit before tax
Profit after tax
Earnings per share (Rs)
Net current assets
Reserves and surplus
Book value per share (Rs)
No. of employees
Exchange rate (US$1 = Rs)
* The financial year for Ranbaxy changed from April 1 to March 31 to calendar year in 1998. Also, the company issued a
1:2 bonus issue (see the changes in share capital and book value per share). The 1998 figures are based on nine months
April to December 1998.
Source: Company files.