Alliance & Acquisition

&
Case study – Eli Lilly India

A Presentation By-

Anirban Banerjee
Priyanka Roy
Rahul Basak
Poulami Ghosh
Ankita Chakrobarty
Alliances and acquisitions

Strategic alliances - Voluntary agreements between firms involving exchange, sharing, or co-
developing of products, technologies, or services

Contractual (nonequity-based) alliances - co-marketing, research and development (R&D)

contracts, turnkey projects, strategic suppliers, strategic distributors, and licensing/franchising

Equity-based alliances - strategic investment; one partner invests in another

Cross-shareholding - both partners invest in each other

Acquisitions - transfer of the control of operations and management from one firm (target) to
another (acquirer), the former becoming a unit of the latter

Merger - combination of operations and management of two firms to establish a new legal
entity
M&As + Alliances
Given the high rates of M&A failures, it seems imperative that firms
seriously and thoroughly investigate alliances as an alternative before
embarking on acquisitions.
Resources and alliances
VRIO Framework
Value alliances - must create value by reducing costs,
risks, and uncertainties

• Real option - investment in real operations as opposed to

financial capital
• Learning race - competitive situation in which partners aim to
outrun each other by learning the “tricks” from the other
side as fast as possible
• Acquisition premium - difference between the acquisition price
and the market value of target firms
 VRIO- Contd..
Rarity - ability to successfully manage inter-firm relationships often called relational (or
collaborative) capabilities may be rare

• Relational (or collaborative) capabilities-Relationships that occur within an

organization firms must have unique skills to execute strategy

Imitability - one firm’s resources and capabilities may be imitated by partners- trust and
understanding -firms without good “chemistry” may have a hard time imitating such
activities - firms that excel in integration possess hard-to-imitate capabilities

Organization - alliance relationships are organized in a way that makes it difficult for
others to replicate- whether acquisitions add value boils down to how merged firms are
organized to take advantage of the benefits while minimizing costs
Alliances and acquisitions
How do firms choose between alliances and acquisitions?
Alliances
• Create value primarily by combining complementary resources.
• As real options, may be more suitable under high levels of uncertainty

Acquisitions

• Derive most value by eliminating redundant resources

• Preferable when the level of uncertainty is low
Formation of alliances
Stage One: To Cooperate or Not to Cooperate?
To grow by pure market transactions, the firm has to independently
confront competitive challenges – very demanding even for resource-rich
multinationals

Stage Two: Contract or Equity?

The choice between contract and equity also boils down to institutional
constraints

Stage Three: Specifying the Relationship

Firms need to choose a specific format among the family of equity-based or
contractual (non equity-based) alliances
Combating opportunism
It is difficult to completely eliminate opportunism, but it is possible to
minimize its threat by:

(1) walling off critical capabilities, or

(2) swapping critical capabilities through credible commitments

Sometimes none of these approaches work, and the relationship

deteriorates
From corporate marriage to divorce
Initiation - initiator starts feeling uncomfortable with the alliance
(for whatever reason)

Going public - initiator likely to go public first but partner may

preempt by blaming the initiator

Uncoupling - alliance dissolution can be friendly or hostile

Performance of acquisitions
Why do as many as 70% of acquisitions fail?
Pre-acquisition

• Executive hubris and/or managerial motives

• Inadequate screening and failure to achieve strategic fit

• 80% of acquiring firms do not analyze organizational fit

• Failure to address multiple stakeholder’s concerns regarding job losses and diminished power

• Integration problems

• Strategic fit

• Organizational fit resulting in inadequate attention to people issues, resulting in low morale and high
turnover

• Clashes of national cultures

Majority JVs as Control Mechanisms
versus Minority JVs as Real Options
Although the logic of having a higher level of equity control in majority JVs
is straightforward, its actual implementation is often problematic.
Asserting one party’s control rights, even when justified based on a
majority equity position, may irritate the other party.

Minority JVs are recommended toehold investments as possible stepping

stones for future scaling up. Whether this more aggressive strategy is
justified remains to be seen.
Case synopsis
• The case is regarding the evolution of IJV which is highlighted in 3
distinct stages.
• It also reflects various management issues at different phases of IJV
• It provides an understanding how changes in the strategic objectives of
parent firms impact the IJV evolution.
• It also reflects how the overall institution changes in the IJV’s operating
environment acts as trigger for evolution and changes.
• Due to the impact of rapid internationalization Ranbaxy had severe
financial stress which prompted them to search for new cash
opportunities.
• This led Ranbaxy to seriously consider for liquidating the ownership in
the Lilly-Ranbaxy joint venture
Global Pharmaceutical industry in the
1990s.
• Mainly concentrated in the United States, Europe, and Japan
• Developing a drug from discovery to launch took 10 to 12 years and cost
???
• Between $500-$800 million.
• Drugs were strictly controlled by government agencies such as the Food
and Drug Administration (FDA)
Patents
Product Patent
• Covered the chemical substance
itself
• Offered typically 20 years of
protection
• Usually a lag time of 10-12 years
by the time the patent was
obtained and the launch date
Process Patent
• Covered the method of
processing or manufacturing the
product
• Very little protection because it
was easy to slightly modify the
process
Problems
• Price Controls in different countries. Prices more than double in Canada
from U.S.
• Parallel Trade: an outside company sells at patented product in a market
not designated to sell the drug
• Generic Drugs
Indian Pharmaceutical Industry in
1990s
• Health insurance was not commonly available
• First Indian pharmaceutical company not until 1954
• Indian drug prices were estimated to be 5%-20% of U.S. prices due to
terrible patent laws
• Prime minister Gandhi in 1982:
• “The idea of a better-ordered world is one in which medical discoveries
will be free of patents and there will be no profiteering from life and
death.”
Eli Lilly & Company
• Founded in 1876 with $1400 and 4 employees
• Chairman Dick Wood decided to take the company global in the mid-
1980s
• By 1992, Lilly manufactured in 25 countries and sold in more than 130
countries
Ranbaxy
• Began as a family business in the 1960s
• By the 1990s, it grew to become India’s largest manufacturer of bulk
drugs and generic drugs
• Had a domestic market share of 15%
The start of the JV
• Ranbaxy would supply certain products they already made under the JV
and finish some of Lilly’s products locally in India. Ranbaxy would also
package and distribute Lilly’s products.
• JV signed in November 1992.
• Each had a 50% stake with an initial investment of roughly $10 million
How it worked
• Andrew Mascarenhas of Lilly and Rajiv Gulati of Ranbaxy were put in
charge
• Hired salespersons and trained them with Lilly’s ethical codes and
training programs
• Lilly made their name in India by something very important and
different: honesty and integrity
• Ranbaxy was driven by the generics business, Lilly was driven by
innovation and discovery
And they’re off…
• First products were human insulin from Lilly and a few generics from
Ranbaxy
• Very hard to be profitable because of India’s regulations
• Ended up focusing on 2 groups: Off patents drugs where Lilly could add
a lot of value and patented where there was a significant barrier
• By 1996, they finally break-even and become profitable
Later in the JV
• By 2001, they became the 46th largest pharmaceutical company in India
out of 10,000 companies
• Ranbaxy had changed their mission to being a “research-based
international pharmaceutical company with $1 billion in sales by 2003.”
• Ranbaxy also made 3 other manufacturing/marketing investments in
developed markets
Before the Breakup
• In 2005, India granted product patent recognition to all new chemical
entities
• There was a slowdown in growth because of intense price competition, a
shift toward chronic therapies, and the entry of large players in the
generic market.
The Breakup
• Eli Lilly was well established now in India.
• Ranbaxy had changed their mission and now want to be more like Lilly
• Ranbaxy expected to price its stakes as high as $70 million
• Eli Lilly bought their stake for $17 million.
• They would concentrate mainly on diabetes, cardiovascular, infectious
diseases, and cancer.
• Lilly also saw this as a new opportunity for clinical trials
Strategy alternatives
Conclusion
• Strategy C is suitable for Eli Lilly as it would increase and strengthen its
foothold in India which it was successful to gain over the years because
of it joint ventures.
• It would utilize its core competencies to take advantages of the many
opportunities of the Indian market.
• The company will also to meet the international sales target needed to
promote its continue success
• It would help in maximizing the returns and increase the profitability
which would meet Lilly’s strategic objectives
Thank You