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LILLY S w 9B04M016 ELI IN INDIA: RETHINKING THE JOINT VENTURE STRATEGY 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. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. This material is not covered under authorization from CanCopy or any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail Copyright 2004, Ivey Management Services 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 Page 2 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 weak. 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 1 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. 9B04M016 Page 3 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 pharmaceutical profits. 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 2 Organization of Pharmaceutical Producers of India Report. 9B04M016 Page 4 9B04M016 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. 3 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. Page 5 9B04M016 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 LABORATORIES 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 pharmaceutical company.4 4 Quoted in Times of India, June 9, 1999. Page 6 9B04M016 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 3). 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. 5 A bulk drug is an intermediate product that goes into manufacturing of pharmaceutical products. Page 7 9B04M016 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, Page 8 9B04M016 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. The Start-up 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. Mascarenhas recalled: 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 enough! Page 9 9B04M016 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. Mascarenhas recalled: 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 Page 10 9B04M016 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 and discovery. Page 11 9B04M016 Mascarenhas focused his effort on communicating Eli Lillys values to the new joint venture: 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 the price. 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. 6 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. 7 Page 12 9B04M016 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: Page 13 9B04M016 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 in India. 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 Tallarigo recalled: Page 14 9B04M016 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 markets. 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, Page 15 9B04M016 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 8 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. Page 16 9B04M016 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 Ranbaxy: 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 Page 17 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 these issues. 9B04M016 Page 18 9B04M016 Exhibit 1 WORLD PHARMACEUTICAL SUPPLIERS 1992 AND 2001 (US$ millions) Company Glaxo Merck Bristol-Myers Squibb Hoechst Ciba-Geigy SmithKline Beecham Roche Sandoz Bayer American Home Pfizer Eli Lilly Johnson & Johnson Rhone Poulenc Rorer Abbott Origin US UK US GER SWI US SWI SWI GER US US US US US US * Market Share Reporter, 1993. ** Pharmaceutical Executive, May 2002. 1992 Sales * 8,704 8,214 6,313 6,042 5,192 5,100 4,897 4,886 4,670 4,589 4,558 4,537 4,340 4,096 4,025 Company Origin Pfizer GlaxoSmithKline Merck & Co AstraZeneca Bristol-Myers Squibb Aventis Johnson & Johnson Novartis Pharmacia Corp Eli Lilly Wyeth Roche Schering-Plough Abbott Laboratories Takeda Sanofi-Synthlabo Boehringer Ingelheim Bayer Schering AG Akzo Nobel USA UK USA UK USA FRA USA SWI USA USA USA SWI USA USA JAP FRA GER GER GER NTH 2001 Sales ** 25,500 24,800 21,350 16,480 15,600 15,350 14,900 14,500 11,970 11,540 11,710 8,530 8,360 8,170 7,770 5,700 5,600 5,040 3,900 3,550 Page 19 9B04M016 Exhibit 2 INDIA ECONOMY AT A GLANCE 1992 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 valuation), end-period Foreign direct investment inflow 1 (in US$ millions) Total exports Total imports Year 1991 2001 1 United Nations Commission on Trade and Development 1991, 2001 Census of India 2 * In millions. Source: The Economist Intelligence Unit. 1994 1996 1998 2000 244 323 386 414 481 77.4 90.7 108.9 132.2 149.3 9.7 9.3 9.1 9.2 9.2 8,665 23,054 23,784 29,833 48,200 252 19,563 23,580 974 25,075 26,846 2,525 33,055 37,376 2,633 33,052 42,318 2,319 43,085 49,907 Population* 846 1,027 Page 20 9B04M016 Exhibit 3 TOP 20 PHARMACEUTICAL COMPANIES IN INDIA BY SALES 1996 to 2000 (Rs billions) Company Glaxo-Wellcome Cipla Ranbaxy Hoechts-Roussel Knoll Pharmaceutical Pfizer Alembic Torrent Pharma Lupin Labs Zydus-Cadila Ambalal Sarabhai Smithkline Beecham Aristo Pharma Parke Davis Cadila Pharma E. Merck Wockhardt John Wyeth Alkem Laboratories Hindustan Ciba Geigy 1996* Company 4.97 2.98 2.67 2.60 1.76 1.73 1.68 1.60 1.56 1.51 1.38 1.20 1.17 1.15 1.12 1.11 1.08 1.04 1.04 1.03 Ranbaxy Cipla Dr. Reddy's Labs Glaxo (India) Lupin Labs Aurobindo Pharma Novartis Wockhardt Ltd. Sun Pharma Cadilla Healthcare Nicholas Piramal Aventis Pharma Alembic Ltd. Morepen Labs Torrent Pharma IPCA Labs Knoll Pharma Orchid Chemicals E Merck Pfizer 2000 20.00 12.00 11.30 7.90 7.80 7.60 7.20 6.80 6.70 5.80 5.70 5.30 4.80 4.70 4.40 4.20 3.70 3.60 3.50 3.40 * 1996 figures are from ORG, Bombay as reported in Lanjouw, J.O.,, NBER working paper No. 6366. Source: Report on Pharmaceutical Sector in India, Scope Magazine, September 2001, p.14. Page 21 9B04M016 Exhibit 4 VALUES AT ELI LILLY RANBAXY LIMITED PEOPLE 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 ATTITUDE 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? TEAM None of us is as smart as all of us INTEGRITY 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 EXCELLENCE Serving our customers In whatever we do, we must ask ourselves: how does this serve my customer better? Continuous improvement 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 Page 22 9B04M016 Exhibit 5 ELI LILLY-RANBAXY INDIA FINANCIALS 1998 to 2001 (Rs000s) 1998-1999 1999-2000 2000-2001 Sales Marketing Expenses 559,766 37,302 632,188 61,366 876,266 96,854 Other Expenses 157,907 180,364 254,822 Profit after Tax 5,898 12,301 11,999 Current Assets 272,635 353,077 466,738 Current Liabilities 239,664 297,140 471,635 Total Assets 303,254 386,832 516,241 No. of Employees 358 419 460 Exchange Rate (Rupees/US$) 42.6 43.5 46.8 Note: Financial year runs from April 1 to March 31. Source: Company Reports. Exhibit 6 LILLY FINANCIALS 1992 to 2000 (US$ millions) 1992 Net sales Foreign sales Research and development expenses Income from continuing operations before taxes and extraordinary items Net income Dividends per share* Current assets Current liabilities Property and equipment Total assets Long-term debt Shareholder equity Number of employees* * Actual value Source: Company files. 1994 1996 1998 2000 4,963 2,207 731 5,711 2,710 839 6,998 3,587 1,190 9,236 3,401 1,739 10,862 3,858 2,019 1,194 709 1.128 3,006 2,399 4,072 8,673 582 4,892 24,500 1,699 1,286 1.260 3,962 5,670 4,412 14,507 2,126 5,356 24,900 2,131 1,524 0.694 3,891 4,222 4,307 14,307 2,517 6,100 27,400 2,665 2,097 0.830 5,407 4,607 4,096 12,596 2,186 4,430 29,800 3,859 3,058 1.060 7,943 4,961 4,177 14,691 2,634 6,047 35,700 9B04M016 Page 23 Exhibit 7 PRODUCT SEGMENT INFORMATION Lilly and Ranbaxy 1996 and 2000 24% 13% 6% 5% 5% Anti-infectives Animal health Cardiovascular Oncology Other pharmaceutical Neurosciences Anti-infectives Animal health Gastrointestinal Diabetes care Gastrointestinal Other pharmaceutical Neurosciences Endocrinology 8% 3% 6% 9% 11% Eli Lilly in 2000 Eli Lilly in 1996 35% 48% 26% 1% 9B04M016 Page 24 Exhibit 7 (continued) 3% 56% 49% 5% 4% 9% 9% Central Nervous System Cardiovasculars Dermatologicals Gastro Intestinal Tract Nutritionals Nutritionals NSAIDS Others GI Tract Orthopaedics/Pain Management Anti-infectives 5% 8% 7% 9% 10% 3% Cardiovasculars Central Nervous System Others Anti-infectives 1% Ranbaxy in 2000 Ranbaxy in 1996 22% Page 25 9B04M016 Exhibit 8 RANBAXY FINANCIALS 1992 to 2000 (Rs millions) 1992-93 Sales Foreign sales Profit before tax Profit after tax Equity dividend Earnings per share (Rs) Net current assets Share capital Reserves and surplus Book value per share (Rs) No. of employees Exchange rate (US$1 = Rs) 1994-95 1996-97 4,607 1,408 358 353 66.50 16.21 1,737 217.90 1,028 57.16 4,575 29.00 7,122 3,019 1,304 1,104 199.80 25.59 5,790 430.50 6,000 149.08 4,703 31.40 11,482 5,224 1,869 1,604 379.10 32.47 9,335 494.00 11,056 233.70 6,131 35.90 * 1998 10,641 4,414 1,240 1,170 560.10 13.46 8,321 1,159.00 12,849 120.90 5,469 42.60 2000 17,459 8,112 1,945 1,824 869.20 15.74 8,258 1,159.00 16,448 136.60 5,784 46.80 * 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. ... View Full Document


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