Eli Lilly and Ranbaxy Joint Venture: Strategy Analysis

Introduction and Background

Eli Lilly entered into a joint venture agreement with Ranbaxy to produce and market pharmaceuticals in India in the early 1990s. Eight years later, the parties were re-evaluating the venture: Ranbaxy was considering selling its stake, and Lilly was unhappy with certain aspects of the arrangement and wanted to reframe it going forward. Eli Lilly brought a number of assets to the deal, including its patents and its brand name, while Ranbaxy contributed access to distribution channels in the Indian market and expertise in drug synthesis. Ranbaxy could produce drugs at costs 50 to 75% lower than those of comparable U.S. plants (Schaan and Kelly, n.d.).

The Joint Venture Structure and Evolution

The arrangement between Eli Lilly and Ranbaxy was structured as a joint venture. Lilly wanted to procure inputs from Ranbaxy but also saw the deal as an opportunity to enter the Indian market. Ranbaxy saw teaming with Lilly as an opportunity to grow, and by 2000 Ranbaxy had become the market leader, selling 20 billion rupees per year. The JV was set up with 50% ownership for each company, and directorship was split evenly as well.

The venture succeeded early, primarily because the operating managers Mascarenhas and Gulati were able to work well together. However, underlying differences existed. In particular, Eli Lilly had built its business as a drug developer and innovator, while Ranbaxy was primarily a generics manufacturer. Ranbaxy was also developing its business internationally — something that was not the case when the venture was originally founded. While the venture was successful for Eli Lilly, Ranbaxy was concerned that it no longer fit with their new business model. The central question, then, was where this JV fit within Ranbaxy's strategy and how the company should proceed. If Ranbaxy chose to divest, Eli Lilly needed a plan for how to move forward. Lilly had enjoyed a strong working relationship with Ranbaxy, and other potential Indian partners might not be of the same caliber. Lilly also had the option of buying out the partnership and making the venture a wholly-owned subsidiary, since that was now permitted under Indian law.

Analysis of the Joint Venture

There are a number of different approaches to market entry. The joint venture option is attractive for several reasons. JVs provide the ability for parties to converge their skill sets, something that occurred in this partnership. Eli Lilly had significant market power overseas, and Ranbaxy gained from Lilly's credibility and ethical standards. However, most joint ventures are characterized by problems, especially when there is a lack of parent firm support and no plan in place for how to terminate the relationship (QuickMBA, 2010).

The joint venture served the interests of both parties when it was formed, but eight years later the circumstances had changed. It is unclear whether Ranbaxy, in particular, would have entered into this joint venture again given the choice. That said, the credibility it gained through the venture helped it achieve the number one position in the marketplace. For Eli Lilly, the benefits of the joint venture remained significant. In particular, having an Indian partner helped it access distribution channels and diffuse political risk. The company would have preferred to keep the joint venture going, but this could only happen if the JV remained a good fit with Ranbaxy's new international expansion strategy.

The first thing that needed to happen was for Eli Lilly to plan carefully for its meeting with Ranbaxy. The initiative was essentially in Ranbaxy's court, and if the company wished to unwind the relationship, Lilly management needed a contingency plan. Unwinding a joint venture can be a costly endeavor. For Eli Lilly, not only would it need to buy out Ranbaxy's stake — potentially at substantial cost — but it would also need to negotiate the other terms of the exit, which could prove equally expensive.

Turowski (2005) notes that joint ventures are generally more successful when the parties build trust from the outset of the process. This was certainly the case when this venture was formed, and it was one of the primary reasons the partnership succeeded so quickly. It is possible, however, that when the second and third ventures failed, Eli Lilly inadvertently violated some of the trust it had built with Ranbaxy. While Lilly may have viewed each venture as an independent business decision, Ranbaxy may have seen each one as a component of a complex, ongoing business relationship. For Lilly to cancel these ventures may have eroded the trust that had been steadily building between the two companies. What was a straightforward economic decision for Lilly might not have adequately accounted for the trust dimension of the partnership — and this could be part of the reason Ranbaxy was now considering moving on.

The immediate priority was to work with Brar to set the course for the venture's future. Lilly needed to enter the meeting knowing whether a JV breakup would require it to find another partner or to buy out Ranbaxy itself, converting the venture into a wholly-owned subsidiary. While Lilly had been successful in India, that success had come largely by relying on Ranbaxy's government relationships and knowledge of local marketing and distribution channels. Lilly would likely still need a partner, and associating with a new firm carries considerable risk. Lilly's priority was therefore probably to continue working with Ranbaxy. If that was not an option, the company needed to recognize that it still required the benefits a joint venture could provide rather than some other form of market presence. Because it still needed access to distribution networks and a strong relationship with the Indian government, operating as a wholly-owned subsidiary was unlikely to allow the venture to grow in the manner to which it had become accustomed.

Additionally, there were significant concerns related to intellectual property rights, particularly with respect to patents expiring in 2005. Lilly would need strong local relationships to eventually bring flagship products like Prozac to the Indian market without undue risk. A licensing agreement would represent a step backwards, given the infrastructure the company had already built in the country.