Eli Lilly in India: Rethinking the Joint Venture Strategy
Eli Lilly and Company is a pharmaceutical company, founded in 1876, that integrates many departments and supply-chain management. The company in itself discovers, develops, manufactures, and sells a broad line of human health and agricultural products (Lilly.com). Eli Lilly had grown to become one of the leading pharmaceutical companies in the United States, and by 1992 its products were being manufactured and distributed throughout 25 countries with sales in over 130 countries. In Eli Lilly’s effort to further implement its globalization strategy into India, Eli Lilly entered into a joint venture with Ranbaxy Laboratories Ltd., an established pharmaceutical firm in India which was started as a family business in 1960.
The two companies joined in 1992 to form the Eli Lilly-Ranbaxy Private Limited (ELR) joint venture. In the case study entitled, “Eli Lilly in India: Rethinking the joint venture strategy,” it describes the global pharmaceutical environment throughout the 1990s into the beginning of the 21st century the growth and of both Eli Lilly and Ranbaxy through their globalization efforts, and their assessment on next steps for the JV . As the global pharmaceutical market grew and ultimately changed since the inception of the ELR joint venture, both Eli Lilly and Ranbaxy reexamined the fundamentals of the venture to see if it was a good business decision to maintain their current alliance. In this paper I will provide analysis on the global pharmaceutical environment, the business environment in India and country specific entry strategies, an overview of the current strategic issues facing the JV, strategic objectives, use of analysis tools (Porter’s Five Forces and SWOT), alternatives to the maintaining the joint venture and recommendations.
The ELR joint venture, established in 1992 between Eli Lilly and Ranbaxy, and by the end of 1996, the venture had reached the break-even point and was becoming profitable. Although the venture was showing tremendous promise, the two partners had two very different business focuses within the pharmaceutical market. Ranbaxy’s business focus was in generics and they catered they strategy to gear toward growth within that segment of the market. Eli Lilly’s business focus was in the area of innovation and discovery. This poised a potential issue for the continued partnership between the two pharmaceutical companies. Given the current environment in the global pharmaceutical industry and different business focus of each of the partners in the venture, the following central question must be assessed in my analysis of the case study: Does ELR joint venture agreement still fit into the strategic objectives of both the Eli Lilly and Ranbaxy pharmaceutical companies? If the ELR joint venture is maintained, what should be the strategy of the venture going forward? If the ELR joint venture is to be dissolved, what would be the reason for breaking up an overall successful venture in the Indian pharmaceutical market?
1. Two different business focuses
Although the Eli Lilly and Ranbaxy were in agreement to form a joint venture, the two pharmaceutical companies had two different business focuses. Ranbaxy was focused on the generic segment of the pharmaceutical business. Eli Lilly however was focused on innovation and discovery. The different focus of the two partners could be viewed as strength to a JV but it can also be viewed as a potential risk to the venture. Business relatedness between partners can have a significant effect on JV control (Hanvanich et al., 2005). Although the two companies are part of the pharmaceutical industry, have a different business focus could eventually lead to a dissolving of the venture as each partner may place more emphasis on its individual focus which may not be conducive to the JV agreement.
2. Ranbaxy is having cash flow issues
During the 1990s, Ranbaxy had formulated a new mission for the company. The new mission was to become a research-based international pharmaceutical company with $1 billion in sales by 2003 (Celly, 2004). In its quest to achieve its mission, Ranbaxy became a part of three other foreign manufacturing/marketing investments in Canada, the United States, and Ireland. The addition of these investments, along with the Eli Lilly JV, created a financial burden on Ranbaxy that was expected to have a significant effect on its cash flow.
Patents are the essential means by which a firm protects its proprietary knowledge. A patent is defined as a grant made by a government that confers upon the creator of an invention, the sole right to make, use, and sell that invention for a set period of time. There are two types of patents in reference to the pharmaceutical industry:
1. The product patent, which covers the chemical substance itself.
2. The process patent which covers the method of processing or manufacturing the substance.
The basic reason that companies patent a new drug is to guarantee the exclusive legal rights to profit from its innovation for a certain number of years, typically 20 years for a product patent (Celly, 2004). Both patents guaranteed the inventor a 20 year time frame to exclusively market its product, however the process patent did not offer significant protection as it was fairly easy to modify a chemical process and difficult to prove that an identical process violated an existing patent.
4. India’s pharmaceutical market
During the 1990s the Indian pharmaceutical market had grown at an average of about 15%, but trends indicated a growth slowdown was on the horizon due to a shift towards chronic therapies, intense pricing competition, and anticipated entry of major players into the generic market. Also, India became a member of the World Trade Organization (WTO) in 1995. Per the WTO, India would begin granting patent protection to all chemical entities by 2005, pointing to increased competition in the market on existing and new products (Celly, 2004). Indian drug prices were estimated to be 5%-20% of U.S. prices due to lack of enforcement of process patent laws.
Prior to entering into a joint venture, both Eli Lilly and Ranbaxy determined what the strategic objectives of the joint venture were and how achieving those objectives would help the partners with their overall globalization strategies. The firms should assess the following about the joint venture to ensure that they can maintain or enhancement their objectives and execute them properly:
1. The marketing strength of the joint venture;
2. The management, staffing and expertise within the joint venture;
3. The continued growth opportunities for ELR and how to ensure that the venture remains profitable;
4. The changing business environment in India due to their membership in the WTO, what does it mean for ELR? What additional competencies can be provided within the joint venture that will allow the joint venture to thrive and to remain competitive in a growing market?
Eli Lilly and Company (Lilly), the 10th largest pharmaceutical company in the world, is located in Indianapolis, Indiana. The company was founded in 1876 and has approximately 38,000 employees worldwide, with approximately 7,300 employees engaged in R&D. The company in itself discovers, develops, manufactures, and sells its products. Currently Lilly’s products are being manufactured and distributed throughout 13 countries and sold in more than 125 countries (Lilly.com). Lilly has emerged as a world leader in the pharmaceutical industry, specifically in the area of oral and injectable antibiotics and in supplying insulin and related diabetic care products.
Ranbaxy Laboratories Limited (Ranbaxy), India’s largest pharmaceutical company, is an integrated, research-based, international pharmaceutical company, which produces a wide range of quality, affordable generic medicines. Currently Ranbaxy has a presence in 23 of the top 25 pharmaceutical markets of the world. The Company has a global footprint in 43 countries, world-class manufacturing facilities in 8 countries and serves customers in over 125 countries (Ranbaxy.com).
Eli Lilly-Ranbaxy Private Limited (ELR) was the joint venture created by partners, Eli Lilly and Company and Ranbaxy Laboratories in 1993. The initial focus of the JV was on marketing Lilly’s products in the Indian pharmaceutical market. This joint venture allowed Lilly to enter in to the Indian foreign market, while allowing Ranbaxy to gain name recognition in the markets which Lilly had penetration. ELRs strategy evolved to focus on two groups of products, off-patent drugs and patented drugs, which allowed the JV to build a significant presence in India and become profitable in 1996, after only three years of existence.
The vision of the ELR joint venture was to become a major competitor in the Indian pharmaceutical market by marketing Lilly’s drugs and developing new products. In the recruitment of employees, the partners wanted to market the newly formed JV as an ideal place to work by utilizing the recruiting theme was ‘Opportunity of a Lifetime’. The JV was to follow the same systems and processes of any Eli Lilly worldwide operations affiliate Mission
The mission of the ELR joint venture was gain a competitive advantage in the Indian pharmaceutical market, while obtaining the goal of building a strong customer base and in the process, helping the partners of the JV expand their globalization efforts.
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Although ELR had grown over the previous decade due to their innovative products and strong leadership with significant input from the JV partners, they faced numerous market challenges related to changing demographics, increased competition, regulatory pressures and healthcare industry cost constraints. The overall evaluation of a business’s strengths, weaknesses, opportunities, and threats is termed a SWOT analysis (Peng, 2009). This is a way to monitor the internal environment (strengths and weaknesses) of an organization as well as the external environment (opportunities and threats) which presents areas for growth as well as risks associated with a particular industry (See the ELR Analytical Tools PPT).