STRATEGIC LEADERSHIP: RANBAXY LABRATORIES

Q. Explain the evolution of Ranbaxy from a domestic trading firm to a global major in the
pharmaceuticals by focusing on the key strategic choices made by the CEOs of Ranbaxy till 2002?

Ranbaxy’s evolution from a domestic trading firm to a global major in pharmaceutical domain began with
the actions taken by Bhai Mohan Singh in response to the environmental factors existing in this space.

 GOI’s ban on drug import in 1959 led to manufacturing of drugs by Ranbaxy in 1961
 Further in 1970, he leveraged the Indian Patent Act and by growing Ranbaxy’s R&D capabilities
simultaneously, made Ranbaxy a large producer of many drug varieties
 Indian Patent Act and the Drug Price Control Order came as a ‘Golden Opportunity’ of sorts for
Ranbaxy as not only did they developed processes for a variety of drugs but it also opened up a
window of opportunity to export into other developing markets
 Thus, by early 1990s, it became the largest foreign exchange earner in this area and became the
market leader in India displacing Glaxo

The regime of Dr. Parvinder Singh further gave a new direction to Ranbaxy’s growth strategy. Unlike his
predecessor, he had a fuzzy vision of developing Ranbaxy into “a research based international
pharmaceutical company with a turnover of $1bn by 2004” by tackling unforeseen challenges in the global
market through clear strategy formulation.

 He had a foresighted view of the upcoming product patent regime wherein focus on enhancing the
research capabilities of Ranbaxy was necessary to better position itself in the market
 But at the same time he realized that for the time being he should focus on Ranbaxy’s core strengths
of generics and develop their growth model around developing superior proprietary processes for
generics
 In order to enhance the effectiveness and efficiency of its overseas operations, he adopted a ‘recon
pull’ approach wherein he classified the world market in 4 regions with each being an independent
profit centre. Thus the idea was to let the managers on ground in those geographies to make the key
decisions with Corporate Office providing an overarching direction
 For venturing into developed markets (with more potential), he developed his strategy by conducting
sufficient reconnaissance with Mr. Brar visiting the US market to understand the key requirements of
manufacturing presence (acquired Ohms Laboratories Inc.), attaining a single global quality standard
(all manufacturing facilities approved by FDA) & access to distribution network (JV with Eli Lilly)
  In 1997, Ranbaxy launched its products in the US and UK and achieved decent turnover. At the same
time, they enhanced their R&D capabilities to support their foray in the international markets and
created International Drug Regulatory Affairs department to handle multi-country registrations
 Ranbaxy created an environment of pressure internally to get people with enhanced level of
commitment and at the same time making sure that these people stay ready for any situation of
turmoil or challenge
 Finally, he also started diversifying the portfolio of products and entered into high growth segments
like cardiology

Thus, it can be seen that where Bhai Mohan Singh gave a jump start to foreign diversifications and R&D
setup, Dr. Singh enriched it by significantly investing into R&D capabilities to support Ranbaxy’s strategic
growth into an array of international markets. This expansion was evolved by Brar who focused on
sustaining focus in the US as well as developing markets.

 To sustain growth in the US market he launched several niche products so as to be able to get access
to a variety of marketing channels along with generating revenues
 With the growing requirement of creating products which do not violate patents as well as being able
to defend those claims, Ranbaxy was able to take advantage of doing the same with a GSK product
 Brar was able to leverage on multiple golden opportunities that arose in the other markets like Brazil
(genericisation of the market by the Government) and Latin America (prompted by success in
Brazil), Japan (health sector reforms). At the same time Ranbaxy strategically entered into markets
like Germany, France, Sweden by acquisitions and/or establishing marketing alliances rather than
having manufacturing facilities
 Ranbaxy at this time also transitioned into lifestyle drugs and Over the Counter segment drugs as
these were growing rapidly due to increased health consciousness among people driven by
Ranbaxy’s desire to reach the people directly
 Finally, by assessing the role that proprietary drugs could play in the growth story of Ranbaxy, the
company shifted focus to simultaneously develop capabilities to produce proprietary drugs. It created
2 segments; NDDS, which would focus on its key competency of generic drugs with a front end cash
flows and NDDR, which would focus on developing new proprietary drugs with a higher gestation
period

Thus, we can see that Brar continued the growth into multiple geographies with a well thought out strategy
with a perspective of positioning the company for a glorified future by identifying emerging needs. This is
exemplified in the move of creating NDDS and NDDR would drive current growth without interference
from the future growth measures enacted by NDDR and vice versa.

Q. What was the implication of transitioning from the early vision of building a ‘research based
pharmaceutical company’ articulated by Parvinder Singh to ‘GARUDA’ in 2002?
GARUDA aimed at making Ranbaxy a $5bn company with 40% revenues coming from proprietary drugs.
The implications of this transition were manifold;

1. In order to develop capabilities to produce proprietary prescription products, steps were taken to
enhance the research potential of the company. This was done by partnering with GSK and Merck at
different stages to develop novel therapies and get the know-how of drug discovery and development
2. As the focus became more and more centred on achieving the $5bn target, under the leadership of
Malvinder Singh, Ranbaxy expanded aggressively in different geographies across the globe. Many of
these expansions (like Romania) were not made with a properly framed entry strategy because of
which Ranbaxy suffered losses there
3. Ranbaxy, instead of indulging in litigations where the outcome is uncertain, started to prefer out of
court settlements, many of which gave it significant revenue streams. The deals like patent
infringement dispute with GSK’s Valtrex and Pfizer’s Lipitor, contributed a lot to Ranbaxy’s
revenues
4. Focus shifted more and more from R&D to explosive growth which led to inadequate R&D practices
in Ranbaxy (e.g. conducting tests with less than permissible time gap). Focusing on partnerships to
get know-how in the proprietary space and and expanding geographically in a steady manner, their
R&D practices in the generic drug space took a hit and led to regulatory issues with the US-FDA

Q. What in your opinion did achieving the targets for GARUDA call for?

GARUDA had a well-defined objective but its execution was improper. The steps taken to develop
proprietary skillset by tie-ups with GSK and Merck was a good move but it required simultaneous internal
development of the high risk New Drug Discovery Research team. But just focusing on NDDR wasn’t
enough. Since, NDDS was at the core of Ranbaxy’s current operations, efforts should have been made not to
sacrifice on its quality standards to force fit it to Ranbaxy’s expansion strategy.

Ranbaxy’s expansion into other geographies happened on a very explosive scale without appropriate
strategy for individual markets. So, sufficient reconnaissance should have been made in these geographies
based on which markets to enter should be shortlisted and strategies should have been specifically devised
for those markets. This is similar to what happened during Dr. Parvinder Singh’s time when Brar and others
went to study developed markets like US, Europe etc. Since, the current expansion was in emerging markets
where situation is more volatile, more extensive study should have been done for the selective countries.

Both venturing into proprietary drug space and expansion in emerging economies were risky ventures; the
company should have had a war chest ready to deal with critical situations. Instead it involved itself in heavy
acquisitions with external debt, leading to a loss of INR 7.77bn. With a war chest ready, Ranbaxy could
have taken quick defensive measures to rectify the issues that were there with its R&D facilities as early as
when US-FDA gave it warning letters in 2006. This was of utmost importance even though it would have
meant de-prioritizing expansion in a few countries.
Q. Critically assess the actions undertaken by the management team and successive CEOs in this
regard?

Mr. Brar:

 In order to achieve the 40% of overall revenue coming from proprietary drugs, growth in R&D
capabilities was a must. To speed up the process Brar got into an alliance with GSK to discover and
develop novel therapies. This was a good move as working in such an alliance would give GSK
significant understanding of the overall process of developing proprietary drugs. But there was the
issue with a very pin pointed objective of 40% revenues through proprietary drugs. This goal should
have been fuzzier as this was an area in which except Novartis, no other generic drug manufacturer
succeeded. A fuzzy goal would have also kept their focus equally distributed on R&D for both
proprietary and generic drugs.

Mr. Malvinder Singh:

 Speedy acquisitions to garner explosive growth was a fine idea considering that they had already
achieved optimal research strength in the generics domain. But the execution had its flaws as in
many geographies, the same was done without a proper strategic plan and prior reconnaissance
which led to losses in those geographies
 Mr. Singh also shifted preference towards out of court settlements for legal disputes. This was an
advantageous move as it not only nullified the uncertainty associated with formal litigations but also
generated significant revenue in multiple instances
 He struck a deal with Merck similar to GSK to enhance capabilities for drug discovery and
development. This was in-line with the objective of getting 40% revenues through proprietary drugs
but considering that they had bigger issues regarding FDA warnings which could potentially hamper
their US market sales, rectification of the same should have been the primary target. In retrospect,
this led to the US demand being met only by the US manufacturing plant which was had low
contribution margins. This is associated with sub-par margins in the years 2008 onwards
 Mr. Singh sold his stakes (34.8%) to Daiichi-Sankyo. This move was taken with the thought that
them being an upper tier innovator company and Ranbaxy being a major generics firm would help
speed up the hybrid model that GARUDA was targeting. The firm thus could have acquired a
dominant position in both generics and proprietary drug areas. But this move was done at a very
unfavourable time as right after this, Ranbaxy got involved in the issues with FDA. In a more
favourable time, Daiichi could have done wonders but here Daiichi didn’t even get the opportunity to
bring their technological expertise. An acquisition involves various cultural as well as organizational
changes which need to be handled in a delicate manner independent of externalities which Daiichi
couldn’t do. This combined with its naiveté in the Indian and generics market led to a huge mishap.
Thus, such a move should have been made in a more favourable time, preferably around 2006.