There were two pharmaceutical companies that were looking for ways to expand globally to position themselves in a competitive advantage from their competitors. One was located in the United States, which was Eli Lilly and Company and the other one was located in India, which was Ranbaxy Laboratories. Research and development was crucial to Lilly’s long-term success. Ranbaxy Laboratories was a firm that was evolved into a serious research-oriented firm. With the change, in the government, India was attracting foreign investors in the pharmaceutical industry. 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 1992.
The main key issues of this case are as follow. The pharmaceutical industry had come about through both forward integration from the manufacture of organic chemicals and a backward integration from druggist-supply houses. The industry’s rapid growth was aided by increasing worldwide incomes and a universal demand for better health care; however, most of the world markets for pharmaceuticals were concentrated in North America, Europe and Japan. Drug discovery was an expensive process, with leading firms spending more than 20 per cent of their sales on research and development (R&D). Developing a drug, from discovery to launch in a major market, took 10 to 12 years and typically cost US$500 million to US$800 million (in 1992). Bulk production of active ingredients was the norm, along with the ability to decentralize manufacturing the packaging to adapt to particular market needs. In most countries, all activities related to drug research and manufacturing were strictly controlled by government agencies, such as the Food and Drug Administration (FDA) in the United States, the Committee on Proprietary Medicinal Products (CPMP) in Europe, and the Ministry of Health and Welfare (MHW) in Japan.
While companies used the global market to amortize the huge investments required to produce a new drug, they were hesitant to invest in countries where the intellectual property regime was weak. Although patent protection was strong in developed countries, there were various types of price controls. Also, the rise of generics, unbranded drugs of comparable efficacy in treating the disease but available a fraction of the cost of the branded drugs, were challenging the pricing power of the pharmaceutical companies.
The 1970s Indian saw several changes that would dramatically change the intellectual property regime and give rise to the emergence of local manufacturing companies. Two such key changes were the passage of the Patents Act 1970 (effective April 1972) and the Drug Price Control Order (DPCO). The Patent Act in essence abolished the product patents for all pharmaceutical and agricultural products, and permitted process patents for five to seven years. The DPCO instituted price controls, by which a government body stipulated prices for all drugs.
Under the leadership of Dr. Manmohan Singh, then finance minister, the government began the process of liberalization and moving the economy away from import substitution to an export-driven economy. Foreign direct investment was encouraged by increasing the maximum limit of foreign ownership to 51 per cent (from 40 per cent) in the drugs and pharmaceutical industry (see Exhibit 2). It was in this environment that Eli Lilly was considering getting involved. The main key...