Strategic Management Dec.

12, 2011

Eli Lilly in India

: ReThinking the Joint Venture Strategy

Group 4

1
Kwon Hyun-jin

Han Seung-soo Lee Ji-hoon Lee Ryun-koo Lee Ye-eun

Table of Contents
. Intro
- Introduction of Eli Lilly and Ranbaxy / Generic Market

. 1992 : Launch of Eli Lilly Ranbaxy JV

- External Analysis / 5 Forces Model for Both - Evaluation on the decision to launch JV

. 1992 2001 : Tracing each step of the evolution of ELR

- Advantages of Joint Venture - Overview of ELRs Leaders (Mascarenhas / Shaw / Gulati)

. 2001 : Looking back the previous 10 years of ELR

- Environmental Changes and its impact on ELR - Evaluation on the overall JV performance

. 2001 : Suggestions
- Strategic options for Eli Lilly - How implement? / Implications

Appendix : Thereafter

. Intro

; Those who meet must part someday [Buddhist Term]

. Intro
Eli Lilly and Company Ranbaxy

: 10th pharmaceutical company in the world

Head Office Founded No. of Employee Revenue Net Profit Current CEO Business Operating Indiana, US 1876 38,066 $ 23,076M $ 5,069M John C. Lechleiter 125 countries (manufacturing operations in 13 countries)

: No 1. Pharmaceutical Company in India

Head Office Founded No. of Employee Revenue Net Profit Current CEO Business Operating Haryana, India 1961 13,420 $ 1,953.4M $ 326.3M Arun Sawhney 125 countries (manufacturing operations in 25 countries)
<Source : Datamonitor>

. Intro

for the treatment of mental disorder

for the treatment of severe acne

the same as VIAGRA

the same as VIAGRA

. Intro

Things to remember : What is GENERIC?

Patent Approval Patent Expire

20 years

sell the product exclusively

copy and sell the product at much lower price

Same product, but price difference is more than 10 times !

. Intro
<Seesaw Game Surrounding Pharmaceutical Industry>
Pay ($80) I will not invent anymore!! Pay ($5)

Government

Innovative Pharmaceutical Company

Insurance (5$) Sale ($100)

Generic Pharmaceutical Company

Sale ($10)

Pay (20$)

Pay (5$)

Customers

. 1992 : Launch of Eli Lilly Ranbaxy J.V.

. 1992 : Launch of ELR JV

<World Pharmaceutical Market>
Political Government more likely to allow generic drugs Economy Economic Growth in Emerging Markets Accelerating consolidation among companies GO TO INDIA! Technology Competition Getting fierce in patent market Social

Weight on Quality of Life

. 1992 : Launch of ELR JV

<Indian Pharmaceutical Market>
Political Encouraging Foreign Direct Investment (40% 51%) Economy Social More interested in Health Care

GDP Growth Expected

WELCOME, PARTNER! Technology

Development of pharmaceutical Mfg. Technology

. 1992 : Launch of ELR JV

<Five Forces Model : Eli Lilly>
Rivalry inside Industry high

Bargaining Power of Supplier

Bargaining Power of Buyer

Threats of New Entrants

high

Threats of Substitutes

. 1992 : Launch of ELR JV

<Five Forces Model : Ranbaxy>
Rivalry inside Industry high

Bargaining Power of Supplier

Bargaining Power of Buyer high

Threats of New Entrants

high

Threats of Substitutes

. 1992 : Launch of ELR JV

Did Eli Lilly Choose Proper Partner?

Provides - Advanced Tech and Management System

Needs - To become a product leader

Needs
- Stepping Stone to Indian Market

Provide - Distribution Channel - Relationship with Gov. - Brand Reliability

. 1992 : Launch of ELR JV

Did Eli Lilly Choose Right Strategic Option?
High Need for Global Integration

Global Strategy

Transnational Strategy

Low Low

Multidomesti c Strategy Eli Lilly Wants to Expand Market Share in India Need for Local Responsiveness High

. 1992 : Launch of ELR JV

Did Eli Lilly Choose Right Strategic Option?

Eli Lilly Wants

Export

Licensing

Strategic Alliance

Acquisition

Wholly owned subsidiary

Cost

Low

Excellent

Excellent

Good

Bad

Bad

Risk

Low

Excellent

Excellent

Good

Bad

Bad

Control

High

Bad

Bad

Good

Excellent

Excellent

. 1992 : Launch of ELR JV

Whay is Eli Lilly expected to gain through JV?
Horizontal Alliance

MARGIN

1
Technological Development Human Resource Mgmt

Gain access to a restricted market

Technological Development Service Service Human Resource Mgmt Technological Development Service Marketing&Sales Marketing&Sales Marketing&Sales Establish a franchise in a new market
Firm Infrastructure

Firm Infrastructure

Procurement

Procurement

Operations Maintain Inbound Logistics

market stability Operations

Inbound Logistics

Procurement

Outbound Logistics

Outbound Logistics

Firm Infrastructure

Human Resource Mgmt

Outbound Logistics

Operations Inbound Logistics

. 1993 ~ 2001 : Tracing each step of J.V.

. 1993 ~ 2001 : Tracing Each Step of J.V.

<Advantages of Joint Venture : General>

- Possibly to increase the brand equity by firms awareness - Ease to access the unfamiliar market minimizing the procedure

-Adopting systems to the Organization

- Spreading out the expense plus the danger of failing

. 1993 ~ 2001 : Tracing Each Step of J.V.

<Overview of ELRs Leaders>

1993 ~ 1996

1996 ~ 1999

1999 ~ 2001

Price Regulation High Turnover Rate Fast Growing Organization Product Approval Process

. 1993 ~ 2001 : Tracing Each Step of J.V.

Challenged by

Build Up
Andrew Mascarenhas (1993 ~ 1996)
First managing director, positioning JV in the Market Hiring sales forces, doctors and financial people Red book introduced to straighten the unethical convention New scheme of HR management to struggle with a higher

. 1993 ~ 2001 : Tracing Each Step of J.V.

Challenged by

Stabilibity
Chris Shaw (1996 ~ 1999)
Basically focused on building systems and processes He hired a senior level manager and created a team to develop standard operating procedures (SOPs) for ensuring smooth operations

. 1993 ~ 2001 : Tracing Each Step of J.V.

Challenged by

Growth
Rajiv Gulati (1999 ~ 2001)
Enlarged the staff even further, to correspond the growing company

Created a medical and regulatory unit to handle the product approval processes with the government

. 1993 ~ 2001 : Tracing Each Step of J.V.

<Eli Lilly Ranbaxys Achievement>

Increased Value Time Decreased Value Breakeven Point

1 2 3

Reached the breakeven point within 3 years

Excellent growth rate surpassing the average growth rate Become the 46th largest Pharmaceutical company in India out of 10,000 companies

. 2001 : Looking back the previous 10y of ELR

. 2001 : Looking back ELR

<Environmental Changes surrounding Pharmaceutical Industry>

Pressure on Indian Government to open domestic market (allowed 100% FDI)

Increasing Development Period / Competition getting fierce between generics and innovators

Different strategic directions between Eli Lilly and Ranbaxy

. 2001 : Looking back ELR

Strategic Direction

New Pharmaceuticals

Generic

Increasing R&D cost and time for approval Challenged by

Already launched JV in US and Europe Financial Distress (due to excessive M&A)

Patent Expire

Can establish 100% owned subsidiary in India

Wants to expand its business to Global Market

. 2001 : Looking back ELR

What did they gain from JV?

1 2 3 4

Brand Awareness in India Market

Tech. (Anti-infectives, etc)

Clinical Trials
Acquiring low-cost sources Knowledge of Indian Market

Moral Employees
Strong Sales Force Access to International Market

. 2001 : Looking back ELR

Net Sales

<Unit : US$ M>

(US$ M) Net Sales Foreign Sales R&D Expenses Net Income Dividends / share Current Assets Current Liabilities Property and Equipment Total Assets Long-term debt Shareholder equity Number of employees

1992 4,963 2,207 731 709 1.128 3,006 2,399 4,072 8,673 582 4,892 24,500

1994 5,711 2,710 839 1,286 1.26 3,962 5,670 4,412 14,507 2,126 5,356 24,900

1996 6,998 3,587 1,190 1,524 0.694 3,891 4,222 4,307 14,307 2,517 6,100 27,400

1998 9,236 3,401 1,739 2,097 0.83 5,407 4,607 4,096 12,596 2,186 4,430 29,800

2000 10,862 3,858 2,019 3,058 1.06 7,943 4,961 4,177 14,691 2,634 6,047 35,700

<Source : Company Files>

. 2001 : Looking back ELR

400 350 300 250 200 150 100

Net Sales
320 227 159 250

373

50
0 1992-93 1994-95 1996-97

<Unit : US$ M>

1998 2000

(US$ M) Sales Foreign Sales Profit after tax Equity Dividends Earnings per share Net current assets Share Capital No. of Employees Exchange rate (1$ Rs)

1992-93 159 49 12 2 0.56 60 8 4,575 29

1994-95 227 96 35 6 0.81 184 14 4,703 31

1996-97 320 146 45 11 0.90 260 14 6,131 36

1998 250 104 27 13 0.32 195 27 5,469 43

2000 373 173 39 19 0.34 176 25 5,784 47

<Source : Company Files>

. 2001 : Looking back ELR

(US$ Thousand) Sales Marketing Expenses Other Expenses Profit after Tax Current Assets Current Liabilities Total Assets No. of Employees Exchange Rate 1998-1999 13,140 876 3,707 138 6,400 5,626 7,119 358 43 1999-2000 14,533 1,411 4,146 283 8,117 6,831 8,893 419 44 2000-2001 18,724 2,070 5,445 256 9,973 10,078 11,031 460 47

<Source : Company Files>

<TOP 20 PHARMACEUTICAL COMPANIES IN INDIA BY SALES>

1996 Rank 1 2 3 4 5 Company Glaxo-wellcome Cipla Ranbaxy Hoecht-Roussel Knoll Pharmaceutical Sales 4.97 2.98 2.67 2.60 1.76 Rank 1 2 3 4 5 2000 Company Ranbaxy Cipla Dr. Reddy's Labs Gloxo (India) Lupin Labs Sales 20.00 12.00 11.30 7.90 7.80

6
7

Pfizer
Alembic

1.73
1.68

6
7

Aurobindo Pharma
Novartis

7.60
7.20

<Source : Market Share Reporter, 1993>

<Source : Pharmaceutical Executive, May 2002>

. 2001 : Looking back ELR

Foreign Sales

200

Foreign Sales
146 96 49 104

173

150

100

+75%
<Unit : US$ M>

50

+253%
1994-95 1996-97 1998

0 1992-93

<Unit : US$ M>

2000

Brand Awareness in India Market Clinical Trials Acquiring low-cost sources Knowledge of Indian Market

Tech. (Anti-infectives, etc) Moral Employees Strong Sales Force Access to International Market
<Source : Company Files>

. 2001 : Suggestions

. 2001 : Suggestions

. 2001 : Suggestions

Strategic Options for Eli Lilly

Leave India ? Maintaining the JV ? Search for a new partner ? Wholly owned subsidiary ? Acquisition of Ranbaxy

Too attractive to leave Ranbaxy did not want Too much sunk cost Possible to live alone in India ? GO AHEAD

. 2001 : Suggestions

strongly powered by

Robust Growth
in Generic Market

Economic
Growth in India Patents Expire

Sustainable Competitiveness from Indian Market

. 2001 : Suggestions
1 Robust Growth in Generic Market

<Market share of generic medicines by volume (blue) and value (red)>

England

<Source : Generic and Biosimilars Initiative Online>

Canada

<Source : Patented Medicine Prices Review Board>

. 2001 : Suggestions

Economic Growth in India

<India GDP Growth Rate>

8.00

INDIA
7.00 6.00 5.00 4.00

7.57 6.65

7.56 6.19

7.39

5.48 4.77
4.27 3.31 3.71 2.36

4.05
3.30 3.00 2.00 1.00 0.00 1991 1992 1993 1994 1995 1996 1997 1998 1999 1.56 2.12 1.79 3.39 2.89

4.03

1.06

World
2000

<Source : World Bank>

. 2001 : Suggestions

3
<Sales volume of Pharmaceuticals expiring its patent in U.S.>
Year
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Sales in U.S. (US$ Billion) 12.7 13.6 13.1 17.4 14.8 15.8 33.2 19.9 24.6 24.2 15.3

Patents Expire
<Top 25 Molecules, Ranked by Total Number of Prescriptions>

<Source : Pharmaceutical Report, 2003>

<Source : Medical Progress Report, 2009>

. 2001 : Suggestions

Sustainable Competitiveness from India

Large Domestic Market

Excellent Human Resources

Available to manufacture all kinds of medicines

. 2001 : Suggestions

(year of 2000, US$ M) Ranbaxy Sales 373 Foreign Sales 173 Profit after tax 39 Net current assets 176 Share Capital 25 No. of Employees 5,784

Eli Lilly 10,862 3,858 3.058 7,943 6,047 35,700

WTO
INDIA

<Source : Company Files>

SPECIALIZE

New Pharmaceuticals / R&D

SPECIALIZE

Generic Market

Appendix : Thereafter

Focusing on New Pharmaceuticals & Bio-Medicines

Ranked at 10th in terms of sales volume (Global) Expected to be difficult due to patent expire

Focusing on Generic (ranked in 10th in generic market / 1st in India) Acquired by Daiichi Sankyo (2008) Expected to grow due to potential growth of generic market

- The End Special Thanks to :

Q/A