Case 6-3 Eli Lilly in India: Rethinking the Joint Venture Strategy

The Indian Pharmaceutical Industry in the past fifty years

• 1947: The Country had no indigenous capability to produce pharmaceuticals, and was
dependent on imports.
• 1954: During this year the first public sector drug company, Hindustan Antibiotics
Limited (HAL) was established.
• 1961: In this year another company started his business Indian Drugs and
pharmaceutical Limited (IDPL).
• 1970: This decade saw many changes that would dramatically change the intellectual
property regime and give rise to the emergence of local manufacturing companies. This
changes were the passage of the patent Act 1970 that abolished the product patents, and
the drug price control by which the government stipulated prices for all products. With
the institution of both the DPCO and the 1970 Patent Act, drugs became available more
cheaply, and local firms were encouraged to make copies of drugs by developing their
own processes.
• 1984: During this year the Indian’s government suffered many changes following
Gandhi’s assassination.
• 1990: The dawn of the 1990s saw India initiating economic reform and embracing
globalization.
• 1990: The government began the process of liberalization and moving the economy
away from import substitution to an export- driven economy.

Eli Lilly and Company History

Eli Lilly and Company grew from a tiny laboratory in Indianapolis in 1876 to one of the
world's largest pharmaceutical companies.
Colonel Eli Lilly, a pharmacist who had served as a Union officer in the American Civil
War, acquired a laboratory on Pearl Street in Indianapolis in 1876 and started Eli Lilly
and Company. His innovative process of gelatin-coating pills helped establish the success
of the company. When Eli Lilly died in 1898, his son Josiah K. Lilly Sr. took control of
the company. Josiah inherited his father's civic mindedness and ordered the company to
send much needed medicine to support recovery efforts following the 1906 San Francisco
earthquake.
In 1919, Lilly hired biochemist George Henry Alexander Clowes as director of
biochemical research. Clowes' negotiations with researchers who developed insulin at the
University of Toronto helped launched the first successful large-scale production of
insulin in 1923. The success of insulin enabled the company to attract well-respected
scientists and, with them, make more medical advances.
Eli Lilly, the grandson of Col. Lilly, was named as the company's president in 1932. In
1934, the company made its first venture overseas when a Lilly office was opened in
England. World War II brought production at Lilly to a new high with the manufacturing
of Merthiolate and blood plasma. In 1943, the company began full-scale production of
penicillin.
Eli Lilly International Corp. was formed in 1943 as a subsidiary to encourage business
trade abroad. In 1945, the company opened a new plant on South Kentucky Avenue in
Indianapolis and, by 1948, Lilly employed nearly 7,000 people. Also in 1948, Eli Lilly
relinquished the presidency to his brother Josiah Lilly Jr. In 1952, the first public shares
of stock were offered and, in 1953, Eugene N. Beesley was named president. He was the
first non-family member to run the company.
Lilly continued to expand. In 1950, Tippecanoe Laboratories, in Lafayette, Indiana,
increased antibiotic production with its patent on erythromycin. In 1954, Elanco Products
Co. was formed for the production of veterinary pharmaceuticals. In 1969, the company
opened a new plant in Clinton, Indiana. In 1968, Lilly Research Centre Ltd. near London,
England was built. It was the company's first research facility outside the United States.
Lilly made an uncharacteristic, but ultimately profitable, move in 1971 when it bought
cosmetic manufacturer Elizabeth Arden for $38 million. Sixteen years later, Lilly sold
Arden to Fabergé in 1987 for $657 million.
Richard Wood was named CEO of Lilly in 1973. During the 1970s and 1980s, Eli Lilly
and Company saw a flurry of drug production: antibiotic Keflex in 1971; heart drug
Dobutrex in 1977; Ceclor, which would become the world's top selling oral antibiotic, in
1979; leukemia drug Eldisine; antiarthritic Oraflex; and analgesic Darvon.
Lilly ventured into medical instruments through the acquisition of IVAC Corp., which
manufactures vital signs and intravenous fluid infusion monitoring systems. Lilly also
purchased Cardiac Pacemaker, a manufacturer of heart pacemakers.
In 1989, a joint agri-chemical venture between Elanco Products Co. and Dow Chemical
created DowElanco.In 1997, Lilly sold its 40 percent share in the company to Dow
Chemical for $1.6 billion. In 1991, Vaughn Bryson was named CEO. During his 18-
month tenure, the company reported its first quarterly loss ever. Randall L. Tobias,
former vice-chairman of AT&T, was named Bryson's replacement in 1993. He was the
first official recruited outside of the company. Sidney Taurel, former chief operating
officer of Lilly was named CEO in 1998, replacing Tobias. Taurel was named chairman
in January 1999. In November 1992 Lilly decided to form the Joint Venture In India with
Rambaxy to focus on marketing Lilly’s drugs in that country with a huge population.
Eli Lilly announced a major expansion plan in July 1999, totaling $1 billion and expected
to create 7,500 jobs over 10 years, but Lilly lost exclusive rights to Prozac in 2001 and
profits fell drastically. The company has since made a comeback with sales on Zyprexa
and Cymbalta.
In October 2006, Eli Lilly announced that it was acquiring ICOS, a partner since 1998,
for $2.1 billion, or $32 a share. The acquisition of ICOS would allow Lilly to gain
complete control over Cialis, a drug used to treat erectile dysfunction, enabling them to
realize operational efficiencies in the further development, marketing, and selling of this
drug. The initial attempt to acquire ICOS failed under pressure from large institutional
shareholders, causing Lilly to offer $34 per share. ISS, a proxy advisory firm, advised
ICOS shareholders to reject the proposal as undervalued. However, the acquisition was
approved by ICOS shareholders and Eli Lilly completed its acquisition of the company
on January 29, 2007.

Ranbaxy History

Ranbaxy Laboratories Limited is an Indian company incorporated in 1961. It is India's

largest pharmaceutical company. It exports its products to 125 countries with ground
operations in 46 and manufacturing facilities in seven countries. It is ranked among the
top 10 generic companies worldwide. The CEO of the company is Malvinder Mohan
Singh. Singh’s visionary management, along with the operational leadership Brar who
joined the firm in 1977, was instrumental in turning the family business into a global
corporation. In the early 1990s, when almost the entire domestic pharmaceutical
industry was opposing a tough patent regime, Rambaxy was accepting it as given.
By the arly 1990s, Ranbaxy grew to become India’s largest manufacturer of bulk drugs
and generic drugs.

The Lilly Ranbaxi Joint Venture

Ranabaxy approached Lilly in 1992 to investigate the posibility of supplying certain
active ingredients or sourcing of intermediate products to Lilly in order to provide low-
cost sources of intermediatepharmaceutical ingredients. Lilly had had earlier
relationships with manufacturers in India to produce human or animal insulin and the
export the products to the Soviet Union using the Russia/India trade route, but those had
never developed into on-the-ground relationships within the indian market.
The first meeting was held at Lilly’s corporate center in Indianapolis in late 1990s,
present were Ranbaxy and Lilly’s executives.
Lilly decided to form the Joint Venture in India to focus on marketing Lilly’s drugs there,
and a formal JV agreement was signed in November 1992The newly created JV was to
have an authorized capital of US$7.1 million, and an initial suscribed equity capital of
US$3 million, with equal contribution fron Lilly and Ranbaxy, leading to an equity
ownership of 50 percent each. The board of directors for the JV would comprise six
directors, three for each company. A management committee was also created
comprising two directors, one from each company, and Lilly retained the right to appoint
the CEO who would be responsible for the day-to-day operations.

Questions
1) Did Eli Lilly pursue the right strategy to enter the Indian market?

2) How would you assess the overall performance of the joint venture? What did the
partners learn from it?

3) What actions would you recommend regarding the Ranbaxy partnership? How would
you implement it?