Eli Lilly and Ranbaxy Joint Venture: Strategy Analysis

Introduction

Eli Lilly and Company has maintained a joint venture in India with Ranbaxy Laboratories Limited. Each firm is a leading pharmaceutical company in its respective country, and though each operates within a distinctly different culture, their joint venture worked well until relatively recently. India, like many countries, is changing the business marketplace through increased regulations and stringent standards that make doing business more difficult, which affects Ranbaxy's cash flow and bottom line. This situation could lead to trouble for Eli Lilly and may, at the very least, affect Eli's bottom line as well as Ranbaxy's. The central question, then, is whether Eli Lilly should be worried about the future of Ranbaxy and, if so, what actions Eli should take to alleviate that concern.

A recent industry article on Ranbaxy notes that "the company is ranked among the top ten global generic companies and has a presence in 23 of the top 25 pharmaceutical markets of the world" (Industry Watch, 2008, p. 48). The article further describes the company as maintaining a "global footprint in 49 countries, world class manufacturing facilities in 11, and a diverse product portfolio" (p. 48). If these characterizations are accurate, then Eli Lilly likely does not have a great deal to worry about — unless the joint venture is specifically at risk from Ranbaxy's slowing cash flow or from the new regulations that India may choose to implement.

Ranbaxy's Global Standing and Joint Venture Background

If only John C. Lechleiter could convince the government of India that what is needed is not additional regulation but greater innovation, the joint venture would likely benefit accordingly. Lechleiter is a strong proponent of innovation; in a speech he delivered in late 2010, he stated: "With the help of medical innovation, not only have we purchased additional decades of life and health… but the economic payback from these gains is also difficult to overstate" (Lechleiter, 2011, p. 15). Lechleiter is unlikely to persuade the Indian government to change course as dramatically as he might hope, but his commitment to innovation as a strategic value may ultimately be a deciding factor in whether Eli Lilly chooses to maintain the joint venture with Ranbaxy or terminate the relationship.

As Lechleiter studies the joint venture, he will likely determine that it has been profitable during its tenure, though the last few years have shown some strain. Since the agreement was initiated in 1995, each company has grown, and the joint venture now encompasses many more products and pharmaceuticals than it did at the outset. Ranbaxy has also established a presence in the United States both through the joint venture and through its acquisition of a generic manufacturer in 1996. The venture itself has been quite profitable for both companies and has helped elevate each firm to even greater prominence in the global market.

Innovation, Leadership, and Strategic Values

Lilly's 2010 annual report states that the company is always looking "to improve the speed and power of R&D at Lilly: building a network of research capabilities inside and outside our own walls" (Lilly, 2010, p. 6). Some of those research capabilities depend on the contributions of strategic alliances and joint ventures such as the one with Ranbaxy.

There are significant concerns surrounding the regulatory environment. As stated in Lilly's 2010 10-K filing: "Our operations are regulated extensively by numerous national, state, and local agencies. The lengthy process of laboratory and clinical testing, data analysis, manufacturing development, and regulatory review necessary for governmental approvals is extremely costly and can significantly delay product introductions" (p. 6). Should India implement more stringent pharmaceutical regulations, they would adversely affect the joint venture's operations and profitability.