Eli Lilly Company in India: Case Study

External Environment

The Most Important General Environment Factor

The pharmaceutical industry is heavily dependent on product and process patent laws to protect its intellectual property, which in turn is the main source of profit for a pharmaceutical firm. Development of new products is a long and expensive process. The process from discovery to launch takes 10 to 12 years and can cost $800 million or more. It would not be worth for any organization to make this kind of investment unless it is assured of profit. Patent protection and intellectual property rights assure the pharmaceutical organization exclusive rights to manufacture and market a new drug for a certain period of time. In the US, this period is typically 20 years. What this means is that the company is able to recover the development costs during these 20 years as well as make profits. So for the pharmaceutical industry, the most important factor which helps it make profits and remain profitable is the legal segment and the laws regarding intellectual property rights and patent protection.

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In developed countries like the US and Europe, the strong patent laws provide pharmaceutical companies with safety regarding their research and development and allow them to price their products appropriately so they can make profits and as well as accumulate funds for future research. The patents also provide the inventing companies with a 20 year monopoly. This makes the patent laws very important for the success of a firm in the pharmaceutical industry.

There are two types of patent: product patent and process patent. The “product patent” covers the chemical substance while the “process patent” covers the method of manufacturing. The process patent provides less protection since it is difficult to prove its violation legally. Unfortunately, until 1950s most countries only provided protection under process patent, though since then many countries have adopted the product patent law.

In view of the importance of the legal environment and the intellectual property rights, pharmaceutical companies, when deciding to expand globally, are reluctant to enter countries which have weak intellectual property regime. In such countries, any company can manufacture the same drug at a much lower cost and prevent the inventor company from appropriately pricing their product. Such low-cost competition can be catastrophic for the company which has invested hundreds of millions of dollars in inventing a product. Hence, when entering a new market, one of the first factors studied by a pharmaceutical company is the intellectual property laws of the country.

Attractiveness of the Industry

The factor which directly influences the attractiveness of an industry is the type of competition within the industry. Porter’s 5 Forces Model of Competition is a good starting point to evaluate the attractiveness of an industry. The various forces according to Porter are the Threat of new Entrant, Bargaining Power of Suppliers, Bargaining Power of Buyers, Threat if Substitute Products and Rivalry among Competing Firms within the Industry. Let us evaluate each one of these factors individually.

Threat of New Entrant

Pharmaceutical Industry is a capital intensive industry. While it is easy to manufacture some of the generic, over-the-counter drugs, these drugs are typically priced low and there is a lot of competition in this segment. To be really profitable, a firm needs to periodically come up with new drugs, and this requires heavy investment. Even discounting this drawback for new entrants, another problem faced by new entrants in the industry is the access to the distribution channel. Doctors typically have certain preferences and convincing them to switch loyalties can be a tall order for a new, unknown organization. Additionally, the biggest barrier faced by new entrants in the pharmaceutical industry is the Government Policies. Since pharmaceutical companies manufacture life saving drugs, these are heavily regulated by the governments. In view of all these barriers, it is extremely difficult for a new firm to establish itself in any market. Hence the threat of new entrants is minimal, making the pharmaceutical industry an attractive one for already established players.

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Bargaining Power of Suppliers

Since most of the raw material in the pharmaceutical industry is either made in-house are bulk produced, the dependence on the suppliers is minimal. As a result, suppliers do not have much bargaining power making the industry an attractive one.

Bargaining Power of Buyers

If we ignore the over-the-counter drugs, most of the products manufactured by pharmaceutical industry are life saving drugs. As such, when a buyer needs such a drug, he does not have much choice and is forced to pay the asking price. This drastically reduces the buyers bargaining power of the buyers. Also, the product monopoly provided by the patent regime means that the buyer is unable to play one firm against another. This also makes the industry extremely attractive.

Threat of Substitute Products

In countries with weak intellectual property laws, it is easy for other firms to manufacture generic drugs with same chemical formula and sell them for a fraction of the costs. This poses a huge challenge to pharmaceutical firms to make profit when the same product is available at a much lower cost. Also, once the patent protection is over, any firm can produce the drug as a generic, drastically reducing the inventor firm’s profits from the drug. This means that in order to remain competitive, the firm must invent a new drug every few years. Although life saving drugs does not have many substitutes, the threat from the generic drugs is real and can severely dent a firm’s profitability.

Rivalry Among Competing Firms in the Industry

There is not much rivalry within the industry since most firms respect the patent laws. Besides, being unable to manufacture a patented drug, they cannot carry out price wars.

In view of the above factors, the pharmaceutical industry is an extremely attractive one for already established players in a market, provided there are strict intellectual property laws in the country.

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Internal Environment

Performance of the Company

Eli Lilly and Ranbaxy formally signed a Joint Venture agreement in November 1992 with an equity ownership of 50 per cent each. The new firm was called Eli Lilly Ranbaxy (ELR). By the end of 1996, within four years of forming the JV, the venture had reached the break-even point and had started making profit. The company continued to grow over the subsequent years. In 1999, there was a management change at ELR and in the subsequent years, the firm showed spectacular growth. In the three years between 1998 and 2001, the venture’s after tax profits rose from INR5,898,000 (USD251 million) to INR11,999,000 (USD561 million), recording a 103% growth in just three years. For a venture which was just 10 years old and considering the severe legal and political limitations in the Indian market, this can be considered brilliant performance. The growth rate also surpassed the growth rate of average Indian pharmaceutical companies. And in 2001, it was the 46th largest pharmaceutical company in India.

Despite having grown so quickly and spectacularly in just 10 years, the profit growth in 2001 was slightly lower than in the preceding year. Between 1998-99 and 1999-2000, profit increased by 109%, however, in the following year, it decreased by 2%. Although such minor fluctuations in the growth of profit should not be of much concern, the fact that the profits have decreased definitely warrants an investigation to look for potential problems.

Firm Strategy

If we carry out a Strategic Gap Analysis of the firm, we find that they had an ideal marketing mix to achieve their strategic plans. The venture carefully selected its products. They did not sell patented products which the generics were selling for 1/60th of the price. They also did not want to launch its proprietary products in India due to a weak intellectual property rights regime. So their strategy was to focus on two groups of products: off-patent drugs and patented drugs where there was a significant barrier to entry. The careful selection of the products meant that they were offering products which had least competition in the local markets.

ELR also priced its products in keeping with its global brand image and local price regime. Wrong pricing can adversely affect a firm’s competitiveness. In India, drugs are sold at a fraction of the cost of the US. In fact, the cost of drugs is the highest in the US. Even in Canada, the price of drugs is 1.2 to 2.5 times cheaper. The drug prices are much lower in India and so it is important to ensure that the drugs are not priced so high that there are no buyers. Also, the prices should not be so low that a firm is unable to make good profits. ELR strategically priced its drugs so as to be able to make profits without pricing it so high that it would be out of reach of the middle class Indians.

After the economic liberation of India in 1991, India was fast emerging as an attractive market. In 1992, the country had a population of 800 million of which 200 to 300 million was middle class. This was a huge market and it made sense for Lilly to enter the Indian markets as a JV with an Indian company, so it could exploit the local company’s knowledge and penetration of the Indian markets. The strict government policies and low awareness of the local markets meant that going alone could have backfired as a strategy.

Perhaps the one feature of ELR which made it stand out from other Indian pharmaceutical companies was its promotion strategy. Lilly had a very strict code of ethics which was adopted by the JV. The sales personal were trained to tell the doctors the truth. Every aspect of the drug, both positive and negative was explained to the customers and if they did not know the answer to a question, the sales people were trained to say so. This honest and straightforward behavior won over many doctors and helped the ELR establish itself and become profitable.

Core Competency of the Company

ELR had certain capabilities and core competencies which formed the basis of its strategy. We shall now discuss these core competencies in details.

Tangible Resources

Eli Lilly is one of the world’s largest pharmaceutical companies. In 1992, it had sales figure of $4537 million. This meant that the company had enough capital to invest in its Indian joint venture. The JV was started with an initial capital of USD3 million and had an overall authorized capital of USD7.1 million. Both the companies of the JV made equal contribution the capital. The Organization’s structure was simple and there was not much hierarchy. Also the firm had limited number of employees making it easy to handle. ELR also had a huge inventory of drugs both from Ranbaxy and Eli Lilly. Lilly had patents on a number of these drugs. Given the huge inventory, ELR could pick and chose drugs which would bring maximum profit to the company.

Intangible resources

ELR was headed by extremely qualified people with years of international experience and knowledge of the local markets. Additionally, the sales force hired by ELR to sell its products was well trained using Lilly’s training program, customize to Indian conditions. These sales people were assured of growth within the industry to reduce employee turnover. Thus ELR was able to hire and retain and extremely talented workforce.

Eli Lilly did not have any brand recognition in India. However, Ranbaxy was a well known Indian company. Thus the joint venture was able to exploit the brand recognition of Ranbaxy and the international experience of Eli Lilly to become a successful firm.

Capabilities

ELR used Ranbaxy’s distribution channel. Ranbaxy was a well established Indian company with a large distribution network. The JV was able to exploit this network to reach the market quickly. The name, Eli Lilly Ranbaxy was adopted because experience had shown that Indians viewed foreign brands as being synonymous with quality. This along with the unique marketing style of the ELR, helped the JV make a brand name for itself quickly in the Indian markets. ELR had a visionary leadership and management and a culture which motivated employees to give their best. Although ELR did not carry out ant research and development activities, both Eli Lilly and Ranbaxy had established R&D facilities which could provide the JV with the required technological assistance as and when needed.

Strategic Capabilities

ELR was able to become successful quickly because it was able to successful exploit the opportunities offered by the opening of the Indian economy. It also strategically chose the product inventory so that the generic drug manufacturers could not compete against ELR. ELR was unique in that it had the twin advantage of Ranbaxy’s local experience and Lilly’s international product inventory. Also, the ELR move to provide the employees with a career and just a job, proved to be a strategic move and helped the firm retain its trained employees longer.

Core Competencies

Analyzing the resources and capabilities of ELR discussed above, we find that the JV was able to form a firm which offered competitive advantage. Both Eli Lilly and Ranbaxy were successful firms and had enough capital to invest in the JV. They both had well established R&D department and were able to provide technical support and backing to the JV. The backing of two well established and successful firms made the ELR joint venture and extremely valuable one.

There are very few Joint Ventures where both the firms can be called equals. Eli Lilly is a global firm with a huge inventory of patented and off-patent drugs. However, in 1992, it did not have any Indian presence. On the other hand, Ranbaxy was a well known Indian firm with global aspirations. In 1992, its business was mainly driven by generics. The two firms and their managers had utmost respect for each other and there was no poaching of talent between the firms. This in itself is rare in Joint Ventures.

Additionally, Eli Lilly had certain drugs in its portfolio which were costly to imitate and hence posed significant barrier to other firms. Also, the Joint Venture was a huge firm. Ranbaxy was able to use its sources in the Indian Government to expedite all the licensing and registering procedures. The foreign name of Eli Lilly made an impact on the Indian doctors. All these factors made it almost impossible for the firm to be exploited. Thus ELR’s core competency was having both an international name as well as local a local face along with the backing of two huge firms with a huge portfolio of drugs which made the JV valuable, rare, costly to imitate and organized to exploit.

Alternatives

The Main Alternatives

By 2001, the environment was fast changing, which prompted the management of both Eli Lilly and Ranbaxy to review the Joint Venture. At this stage they had several alternatives. Let us review each one of these alternatives.

Option 1: ELR could decide to continue with the JV. In the 10 years since its inception, the JV had performed exceedingly well and had continued to show profits. In fact in the three years leading to 2001, the after tax profits had grown by 109%. So it made sense to continue with a winning formula.

The biggest problem with this option is that Ranbaxy had also grown in the intervening 10 years. The success of the JV was largely due to no direct competition between Ranbaxy and the joint venture. There was also no poaching of talent between Ranbaxy and Lilly. However, as Ranbaxy grew, it became increasingly likely that Ranbaxy would start competing directly with ELR. This would have eroded ELR’s core competency.

Option 2: The joint venture should be ended and Eli Lilly should start independent operations in India. This option has a lot of merits since starting from 2005, India was granting product patent recognition. This meant that Eli Lilly could market its global best sellers in India for greater profit and would not have to bring only limited drugs to India. It was also no longer dependent on Ranbaxy for substantial portion of the product inventory.

The major problem with this option is that Eli Lilly would have to start from scratch and would not be able to depend on Ranbaxy’s distribution channel. Breaking up the joint venture would also impact Ranbaxy as it would no longer have the global knowledge and support of Eli Lilly.

Recommendation

Considering the changing environment, it would make sense for Eli Lilly to end the Joint Venture and start afresh in India. In the ten years since 1991, Eli Lilly has acquired a reputation and its brand name is now recognizable among doctors. The firm has also had experience of the Indian conditions. Also, with new patent regime, Lilly will be able to market its blockbuster drugs in India.

If Eli Lilly were to continue with the JV, it would have to share the profits with Ranbaxy. This is not in favor of Eli Lilly. Hence, under the circumstances, the best option for Eli Lilly is to end the Joint venture and start afresh in the Indian markets.

Looking at the situation from Ranbxy’s point of view also, ending the Joint Venture would benefit the Indian firm. In the ten years since the formation of the JV, Ranbaxy has grown to have an international presence. Its mission is to become a research based international pharmaceutical company by 2003. It is already following the global standard of earmarking 20% of its profits for R&D. Ranbaxy has also made investments in international markets, helping it become a global player.

Under these circumstances, continuing with the joint venture would harm both the firms since they would now come into direct competition with each other. What made ELR unique was the mutual respect that the two companies had for each other and their different core competencies. However, these differences were fast disappearing, and continuing with the JV is increasingly becoming infeasible. So, in view of all this, it is recommended the Eli Lilly and Ranbaxy should end their Joint Venture and go their separate ways in the better interest of both the firms.

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