New markets
India and most of the Asian region, was at that time very interesting for western companies, and it still is today. India with its middle class, estimated to be around 200-300 million people, had a huge market for pharmaceutical products. Furthermore production costs were lower than in the American states. A lot of international pharmaceutical companies were present in India, under the current restrictions, but were having a hard time which forced several of them to close down after only some years in India.
Therefore India was an attractive market for Eli Lilly, and when negotiations started with Ranbaxy it showed that the two companies had more in common than first assumed.
Advantages with a Joint Venture
There are several advantages with a Joint Venture. First of all, it is important to notice that Eli Lilly more or less was forced into this Joint Venture. A lot of international pharmaceutical companies were present, so to be competitive world wide Eli Lilly needed to respond. Furthermore the then restricted pharmaceutical business prohibited Eli Lilly establishing their own 100% owned India-based Eli Lilly subsidiary. So in order to be present at the Indian market, Eli Lilly needed to partner up. Ranbaxy was the perfect fit. At a time were patent were no good in India, Ranbaxy was focused on research and development. This is very important for a pharmaceutical company, and with many Indian companies focusing on copying existing pharmaceutical products, the Ranbaxy type of company was rare.
The advantages for the Eli Lilly were that they got a partner with a thorough knowledge of the local market;
We felt that we could use Ranbaxy’s knowledge of the market to get our feet on the ground in India.
As stated by the general manager, Eli Lilly used Ranbaxy and the newly established joint venture to get into the Indian market.
Disadvantages with a Joint Venture
As well as there are advantages with a joint venture, there are also disadvantages with a joint venture. The Eli Lilly Ranbaxy case exemplifies a rather rare situation, where there is no cannibalisation. Meaning that neither Eli Lilly nor Ranbaxy loses anything regarding their core business after establishing the joint venture. Furthermore a joint venture could be an obstacle for further investments in the market. As with the case in hand, a further expansion of Eli Lilly in India would mean dealing with Ranbaxy first. This could be a costly affair.
Joint Venture in a global corporate strategy
Changes
Almost ten years has passed since the establishment of Eli Lilly Ranbaxy, and the pharmaceutical business in India has changed a lot. Legislation and market situation are the main contributors to these changes.
Legislation
A new more open legislation has been introduced, meaning that foreign investments are more welcome and secure. This states that foreign companies now are allowed to own more than half of the companies as the law stated before. Furthermore products and processes are now protected by patents. It is almost impossible to convince foreign companies to invest in research and development, when the result is not protected in any way and therefore open to copying by anyone else.
Market
When Eli Lilly and Ranbaxy joined forces in the joint venture, the Indian company was going strong. Towards the meeting between the two partners in 2001, Ranbaxy has experienced troubled waters. In 1992-93 Ranbaxy’s share of foreign sale was 30% compared to 46% in 2000, clearly indicating that Ranbaxy had become a more internationalized company, even with activities in Eli Lilly’s home market, United States of America.
Eli Lilly on the other hand has been more stable. In 1992 the company was the twelfth largest supplier based on sales of pharmaceutical products, moving two places up to tenth in 2001. Indicating that Eli Lilly had grown, mainly in their home markets. Going from 55% home market sales in 1992 to 65% in 2000. So overall we have to different evolving companies, Ranbaxy being more international and Eli Lilly more local.
If the sales from the Joint Venture was a part of Eli Lilly’s net sales, that number would only be 0.2% of total sales in 2000, compared to nearly 5% if it was Ranbaxy.
Furthermore the product portfolio of the two companies has shifted. Eli Lilly’s focus in 1996 was anti-infectives with 35%, but that number is reduced to 8% in 2000, taking over is Neurosciences with 48%. This tells a story about heavy research and development, as the market shares tells that Eli Lilly has been successful with this shift in portfolio. On the other hand, Ranbaxy’s portfolio has not changed a lot. Anti-infectives were the main product in 1996 and still are in 2000. Clearly indicating that, despite their intentions, research and development has not been a top priority.
At last cash generated from the sale of Ranbaxy’s share in the joint venture is reported to be used to secure future cash flows, by investing into already existing markets. They are shifting focus towards their own core business.
Possibility for R&D centre
With the new legislation the basis for an India-located R&D centre for Eli Lilly is there. With patent secured and with a lower cost base for developing new products and processes, the R&D in India is very interesting for a company like Eli Lilly.
Studies shows that R&D is concentrated in developed countries. But the basis of a R&D centres placed in India is growing, because of improved quality of the workforce and its compared lower cost.
Furthermore studies have shown that there is a sharp increase in foreign development investments, but this trend is most visible in other countries than USA. By doing this, Eli Lilly could gain a competitive advantage. But to have success with a foreign R&D center it needs to have the right size, in order to generate the right amount of value for the Eli Lilly organisation,.
Distribution channels
The only visible problem with this is the distribution channels, because the channels used so far is Ranbaxy’s. But in a decision situation, this fact should not have the final saying.
Ranbaxy’s share
The share of the joint venture belonging to Ranbaxy should be interesting for several other Indian companies, as they want to get their hands on new developed technologies. The decision regarding buying the share or letting another company buying it, should be based on the corporate strategy and a view at the basic assumptions for a partnership. The business opportunity at hand is still very attractive for Eli Lilly, as the joint venture has proven to be profitable and could be even more profitable for the entire organisation with a functional R&D centre. But collaboration might not be the ideal solution to obtain this possibility, as there are no more restrictions that forces Eli Lilly into a joint venture. Therefore Eli Lilly should focus on buying Ranbaxy’s share of the joint venture.
Don’t split, find a new way of working together
Several companies have had success with a new way of acquiring foreign activities. Earlier it was common to replace the organisation of the target with that of the buyer. By doing this the organisation of the target is in danger of collapsing. But the set of values introduced in Eli Lilly Ranbaxy has not been dictated by neither of the two companies, and if it is anything its closets to the value set of Eli Lilly. This gives Eli Lilly the best possibilities of a successful acquisition.
But it is important that Eli Lilly and Ranbaxy do not split entirely, but finds new ways of working together. As stated earlier, the product portfolio and strategy does not collide, and therefore the two companies will be able to continue in a strategic partnership.
Conclusion
Eli Lilly has seen a rather changed world during the almost 10-year span with the Ranbaxy partnership. At the time it was the correct decision to engage in a joint venture with Ranbaxy, as India was a very attractive market. But due to legislation and the fact that a joint venture could give them a partner with local knowledge, the decision was correct. But now time has changed, and the India market is not the same. The market has seen remarkable growth, as well as reforms securing a better soil for a foreign investment from Eli Lilly. A subsidiary in India is essential in securing a place at the growing market, as well as a R&D centre is a potential that should be invested in. The best decision would be to secure the entire joint venture, by buying Ranbaxy’s share. There will be a lot of Indian companies interested in Eli Lilly’s technology, and with patents introduced it gives the American company a chance to securing these in the ever constant global competition. Foreign development investments are crucial for a pharmaceutical company in order to assure a steady flow of patents, as the overall cost base are lower outside the U.S. This means that cheaper patents could be obtained, and therefore leading to higher gross margins that the ones produced back home. By doing this, Eli Lilly could be securing their future.
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