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DEVELOPMENT DAY PROJECT REPORT

STRATEGIC ALLIANCE IN INDIAN PHARMACEUTICAL INDUSTRY

Submitted by:Name: Jagriti Singh (20090123)

Amardeep Tomar(20090106)

Shilpa Jaiswal(20090155)

Anil Chauhan(20090108)

Batch: 2009 – 2011.

MANAGING THROUGH WISDOM

INTRODUCTION

The competitive landscape of the Indian business firm has seen a dynamic change in the 1990s as a result of dual institutional changes of economic liberalization and changing intellectual policy regimes. Liberalization and its accompanying changes in trade, industry, foreign investment and technology policy regime, triggered previously protected Indian companies towards capability enhancement. This translated into a two pronged competitive strategy by the Indian firm - the adoption of a defensive strategy was aimed at protecting its competitive position in the domestic market and an assertive strategy aimed at leveraging new opportunities through internationalization. This paper examines the changing strategic orientations of the Indian Pharmaceutical industry through a study of its international venturing. It finds that firms have used acquisition as well as alliances in the spirit of co-opetition rather than competition, both in the domestic and international market as an important element of the industry’s survival strategy.

Introduction to Indian Pharmaceutical Industry

In the The Indian pharmaceutical industry has shown tremendous progress in terms of infrastructure development, technology base creation and a wide range of production. Even while undergoing restructuring, it has established its presence and determination to flourish in the changing environment. The industry now produces bulk drugs belonging to all major therapeutic groups. Strong scientific and technical manpower and pioneering work done in process development have contributed to this. Total production of bulk drugs and formulations during 1997-98 is estimated at Rs. 26280 million and Rs. 120680 million respectively. The growth rate has been around 15% for bulk drugs and 20% for formulations during ninetees. The performance on the export front is also noteworthy, clocking a growth rate of more than 20% in 1997-98. Nevertheless, the scope to increase the volume of exports is tremendous.

In last decade emerging economies have begun to account for an increasing flow of global FDI. Not only have countries like India and China become important investment destinations, they are also beginning to account for an increasing flow of outward FDI (OFDI). In the Indian case while inward FDI doubled between 2004 and 2006, OFDI grew four times in the same period (UNCTAD 2007) led by increasing flows of cross border M&A activity by firms in the IT and pharmaceutical sector.

The increase in overseas activity by Indian firms can be seen as their response to globalized competition since 1990s. With liberalization and changes in trade, industry, foreign investment and technology policy regime, previously protected Indian companies have been exposed to global competition. Indian firms increasingly realized that their existing technological and other capabilities accumulated with predominant dependence on protected home markets and under the

import substitution policy regime of the past were clearly inadequate to cope with this new competition unleashed by a more liberalized business environment. This forced them to improve their competitive strength immediately and enlarge their position in the world markets. Indian companies realized that adopting a long term competencies building strategy with large investment in R&D, advertising, etc was relatively more risky and costly than pursuing the route of overseas acquisitions and alliances.

This study seeks to examine the changing strategic response of the Indian pharmaceutical industry as a consequence of the opportunities generated by two significant policy changes in the 1990s viz. liberalization of the Indian economy and the changes in the Patent Act of 1999 in its competitive environment. It posits that the industry’s strategic positioning combines elements of collaboration with competition to cope with the changing global environment. It uses episodes of regulatory change as factors that have triggered a reorientation of firm capabilities and strategic change. Using the Resource based view (RBV) it examines the recent outward venturing experiences of the pharmaceutical industry as an indication of its strategic positioning in response to a changed competitive environment. Although a wide variety of actions are classified as FDI this study examines substantive forms of outward FDI associated with foreign market entry in which new ventures are established. Compared to other forms of outbound venturing such as exports or the establishment of a branch office, the establishment of a new venture / takeover of an existing one requires a greater commitment (Zahra and Covin 1995; McDougall and Oviatt 2000).

The rest of the paper is organized as under: section 2 examines the framework of firm internationalization as a process of strategic renewal in the developing country perspective; section 3 traces the evolution of the Indian pharmaceutical industry and its contribution to capability development; section 4 examines recent episodes of international venturing as indicators of strategic change and section 5 concludes.

Firm Internationalization as Strategic Renewal

Strategic renewal is an evolutionary concept by which organizations shed their inertia and develop new competencies that protect them from obsolescence during technological and market disruptions ( Huff, Huff and Thomas, 1992, Burgelamn 1991). It emphasizes the acquisition of new knowledge based resources and productive assets as a route to changing competencies (Floyd and Lane 2000). The notion of renewal thus mirrors the dynamic capabilities literature, which argues that fast changing environments require firms to engage in activities that enable them to reconfigure their resource configurations, and thereby engage in path dependant and dynamic capability acquisition processes (Teece et al 1997, Eisenhardt and Martin 2000). Since internationalization involves both development of new capabilities and changes in product market domains (Ray et al 2007) it has served as the vehicle of strategic renewal for the Indian pharmaceutical industry.

In other words, notions of renewal and dynamic capabilities focus on the need for organizations to engage in a continous process of change in products, resource, capabilities and modes of organization to generate competitive advantage as an antidote to technological and market discontinuities in fast evolving markets (Rindova and Kotha 2001). Natural, socio-economic and political events such as radical innovation, technological discontinuities and radical regulatory changes are some of the triggers which have provoked a market change through creation of new opportunities causing a strategic transition.

Organisational capability is a system of organizational routines that create firm specific and hard to imitate advantages. A firm’s organizational capability consists of (i) static capabilities to consistently outperform rivals at any given point in time and (ii) dynamic capabilities that enable a firm to improve its performance and outperform its rivals Penrose (1968), Nelson and Winter (1982), Teece (1992). Nelson and Winter (1982) explain that a firm’s capability development depends upon access to technological and organizational knowledge and conditioned by its past learning. These capabilities are heterogeneous, conditioned by local factors and difficult to imitate or replicate. The heterogeneity of firm capability and its stickiness are responsible for the diversity of firm strategy.

Dynamic capabilities evolve over time due to endogenous market changes and exogenous shocks adding value to a firm’s existing capabilities and improving its competitive advantage. Dynamic capabilities in the context of market changes refer to a set of identifiable processes such as product development, strategic decision making and alliancing , idiosyncratic in detail and path dependant in emergence but with some common features across firms.(Eisenhardt and Martin (2000)). Radical regulatory changes such as economic liberalization and the changing IPR regime have presented firms with rapidly changing market situations. The existence of rapidly changing markets presents firms with the possibility of leveraging existing capabilities to produce lasting new competitive advantage. The literature on technology management uses the product life cycle view of industry to explain the different capabilities necessary for success in different phases of the industry life cycle. This

literature posits that firms follow strategic variety in the early stages of a technology/ industry evolution but there is a convergence of firm strategy once a dominant design is established. (Utterback 1996). Thus the emergence of a new economic or technological opportunity leads to a diversity of strategy till one of them emerges as the dominant design.

In the context of the Indian pharmaceutical industry economic liberalization and the new IPR regime opened up new global opportunities, which necessitated strategic change as firms looked towards capability enhancement in view of the changed market environment.

Institutional theory (Hoskisson et al., 2000; Scott, 1995) has been a useful tool for understanding phenomena related to emerging economies. Institutions are conceptualized as ‘the rules of the game in a society’ (North, 1990: p.3; Scott, 1995) and institutional transitions are defined (Peng, 2003, p.276) as the ‘fundamental and comprehensive changes introduced to the formal and informal rules of the game that affect organizations as players’. One of the defining features of emerging economies is the policy of economic liberalization favored by their governments (Hoskisson et al., 2000, Wright et al., 2005). Economic liberalization is a unique and powerful environmental contingency faced by firms from these developing economies compared to firms from advanced nations, which have traditionally been more market-oriented. Firms in the countries undergoing economic liberalization face significantly different business environment characterized by increasing competition, changing regulations, increasingly demanding customers, emergence of new business opportunities, etc (Ray, 2003). The forces of economic liberalization acting on the firms from emerging economies are therefore equivalent to significant ‘institutional transitions’ (Peng, 2003).

The process of firm internationalization in India in the post liberalization era has witnessed an unprecedented number of overseas acquisitions and alliances led by the IT and pharmaceutical industry. Traditional explanations dominated by Dunning’s OLI hypothesis (1973, 1993) have focused on asset exploitation as the main motive of firm internationalization, but alternate viewpoints especially in the emerging economy context have used the asset seeking / augmenting perspective to explain overseas expansion ( Wesson 1999; Mathews 2002; Makino 2002, Li 2003). This paper examines the main motives behind internationalization of the Indian pharmaceutical industry in its quest for strategic renewal.

It builds on existing research that has studied how the ability of organizations to respond to change has critical implications for their performance and survival. For example, the challenges faced by incumbents to adapt to technological and market disruptions, and the consequences when they fail to respond appropriately are well documented (Christensen and Bower 1996, Henderson and Clark 1990). Thus, the ability to develop new sets of capabilities, as the basis of competitive advantage shifts over time has emerged as an underlying theme in strategy and organization research (e.g. Helfat and Peteraf 2003, Teece, Pisano, and Shuen 1997).

The Indian Pharmaceutical Industry

The Indian pharmaceutical industry is ideal for a study of internationalization strategies in the emerging economy context since it has been a leader in outward expansion along with the IT and auto ancillary sectors and had led the OFDI since 2000, spearheaded by the spate of cross border M&As. It has also faced the dual impact of economic liberalization and change in intellectual property regime, threatening its very sources of competitive advantage. Despite these challenges it has seen a resurgence of incumbent firms many of whom have employed diverse strategies of internationalization (BCG 2006) to cope with changes in its competitive environment.

The Indian pharmaceutical industry ranks 4th in volume and 13th in value in the world today, accounting for 8% of global production and 2% of the world pharmaceutical market (OPPI 2009). It has a production value of approximately $4.5 billion and employs 5 million workers directly and 24 million workers indirectly. The industry structure is dualistic with about 90% of the 20,000 firms in the small scale sector.

The industry has been governed by a radical regulatory framework including The Indian Patent Act of 1970, the Industrial Policy Act, 1991 and the signing of TRIPS in 1995, all of which have provided the opportunities for strategic change and renewal of firms in the industry.

The Indian Patent and Designs Act (1911) which originally governed the industry dated back to 1856. It authorised issuing of both process and product patents. These patents were valid for a period of sixteen years and could be extended for another period of ten years if the patent holder believed that he had not been adequately defrayed for his innovation. It was a tool in the hands of the multinational companies (MNCs) of the developed world to keep the Indian market exclusively for themselves. They held between 80 to 90% of the patents and indulged in prohibitive prices, which were among the highest in the world. The Patent Enquiry Committee (1948) specified that “the Indian patent system had failed in its main purpose of stimulating inventions among Indians and encouraging the development and exploitation of new inventions for industrial purposes in the country so as to secure the benefits thereof to the largest section of the public.”

The Indian Patent Act of 1970, aimed to strengthen the domestic pharmaceutical industry which provided legal sanction to process patents for pharmaceutical products. Instead of granting patents to end-products as is done in developed countries, the Indian Patent Act allowed patents of the manufacturing process. This regulation, coupled with special incentives to small scale units, enabled the Indian pharmaceutical firms to thrive and take away the dominant share of the market from the multinationals. Thus, until the early nineteen nineties, the Indian pharmaceutical industry was one of the most inward-looking, highly protected industries, completely dominated by firms of Indian origin.

The IPA 1970 brought in a number of radical changes in the patent regime by reducing the scope of patenting to only processes and not pharmaceutical products and also for a short period of seven years from the earlier period of 16 years. It also recognized compulsory licensing after three years of the granting of the patent. The enactment of the process patent regime contributed

significantly to the local technological development via adaptation, reverse engineering and new process development (Aggarwal, 2007; Pradhan and Alakshendra, 2006). These measures along with investment in a network of universities and research institutions created a huge pool of qualified labour in the form of chemists, pharmacists, engineers and managers which infused new life into the industry. (Athreya et al 2008) and helped to develop its technological capability. The market opportunities opened by the Indian Patent Act of 1970, the constraints for expanding the manufacturing base under the license Raj and the endogenous evolution of the market together determined the capabilities of the industry in this period. The knowledge base of the industry was firmly embedded in organic and synthetic chemistry. The change in regulation opened the floodgates for the development of the generics market through new, cost efficient process technologies as Indian firms adopted “duplicative imitation” and “creative imitation” as strategies for technology capability development. ( Kale and Little 2007). The market was led by firms that had the competence in chemical process technologies necessary for re-engineering targeted drugs and the ability to withstand technology races in process improvements through pursuing a diversified product portfolio.

By the mid 1980s most Indian pharmaceutical firms were producing bulk drugs and formulations for the domestic market and leading firms like Ranbaxy had begun to explore Asian and African markets. The focus of the industry was on innovation for cost-efficient or quality enhancing processes, direct commercialization of innovation in countries where the product patent regime was not recognized and licensing and market technology agreements with Western multinationals. The comparative advantage of the Indian firm in reverse engineering and process improvements enabled it to access the US and European markets for generics. The Indian firm’s capabilities had been developed in the middle stages of the product life cycle but had been excluded from the new drug discovery and clinical trial stages.

The decade of the 80s witnessed technological upheaval and radical regulatory reform in western markets. Significant among these was the Hatch – Waxman Act passed in 1984 in the USA to stimulate the market for generics, lower prices and enable greater accessibility to healthcare for its citizens.

Economic liberalization measures by the Indian government in 1991 aimed to establish stronger linkages with global economy and resulted in profound policy changes for Indian industry in general and the Indian pharmaceutical industry in particular. India signed the General Agreement on Tariffs and Trade (now WTO) agreement on intellectual property in 1994 making it mandatory to introduce product patents and provide legal protection to Trade Related Intellectual Property Rights (TRIPS) by 2005. Liberalization of the economy was accompanied by delicensing of the pharmaceutical sector. In 1995 50% drugs were removed from price control and by 2004 only 76 drugs (26%) remained under price control.

TRIPS changed the competitive landscape of the pharmaceutical industry. Its provisions specifically banned the production and sales of re-engineered pharmaceutical products, extended the product patent regime upto 2005 and forbade discrimination between imported and domestic products. This was the chance for global MNEs to bring in their best products to India resulting in a steep increase in competition. This marked a dramatic strategic change for the Indian pharmaceutical industry and was the trigger for a change in its internationalization strategy.

It targeted the western regulated markets for R&D in the context of drugs, vaccines and diagnostics that were off patent or about to be off patent. It also entered into contract research and custom manufacturing, bioinformatics for genomics based drug research and clinical trials for the larger western MNCs. At the same time some firms were investing in the development of new drugs for global diseases such as diabetes. This led the industry on the path of internationalization through cross border M&As which were motivated by capability enhancement for drug creation and performing preclinical and clinical trials to cope with a changed competitive landscape. It also simultaneously entered into collaborations and alliances creating an environment of co-opetition. The following section examines recent episodes of internationalization to understand the motives and strategies of the pharmaceutical industry in its changed global environment.

TECHNOLOGICAL STRENGTHS OF INDIAN PHARMACEUTICAL INDUSTRY

The following form the basis of the technological strengths of the Indian pharmaceutical industry:-

Self-reliance displayed by the production of 70% of bulk drugs and almost the entire requirement of formulations within the country

Low cost of production Low R&D costs Innovative Scientific manpower Strength of National Laboratories   Increasing balance of trade in pharma sector                                 

BRIEFLY BACKGROUND OF FIRMS

Ranbaxy Laboratories limited ( Ranbaxy), incorporated in 1961, is the largest Indian company in terms of sales, third largest in the formulations market and occupies the 8 th global rank in the generics market. It pioneered the exploration of the generics market long before liberalization and the WTO accession announcement by utilizing its organic chemistry skills and investing in own process R&D to develop non-infringing process patents. Leading the acquisition tally, it has followed the stage model of internationalization beginning with a JV in Nigeria in 1977, followed by the setting up of regional offices, alliances and acquisitions. Its products are sold in over 125 countries, with manufacturing operations in 11 countries and a ground presence in 49. In June 2008, Ranbaxy entered into an alliance with one of the largest Japanese innovator companies, Daiichi Sankyo Company Ltd., to create an innovator and generic pharmaceutical powerhouse. The combined entity now ranks among the top 15 pharmaceutical companies, globally. The transformational deal will place Ranbaxy in a higher growth trajectory and it hopes to emerge stronger in terms of its global reach and in its capabilities in drug development and manufacturing.

Strides Arcolab occupies second position among the pharma acquirers. In order to meet the challenges of the TRIPS based regime the company, which is in the generic space, has over time continuously changed its strategies to align them with the emerging global opportunities. It has chosen to focus on difficult to manufacture and innovate niche drugs and to develop a strong product pipeline which it can utilize in its global initiatives, while providing highly cost competitive R&D as well as focus on manufacturing capabilities. It has, over the last few years, acquired a global presence in terms of manufacturing capacities as well as brands and distribution capabilities. It has simultaneously continued to focus on building partnerships in the regulated markets in order to enable it to access them quickly and utilize the partners’ strengths on the regulatory and distribution side. In acquisition it has targeted companies which have manufacturing capabilities in its focus areas and have an existing product portfolio.

Glenmark Pharmaceuticals, established 1977 a global presence in over 80 countries through a combination of alliances and acquisitions. It realized the importance of growth through acquisitions early in its life and its initial domestic growth is attributed to domestic brand acquisition. Its global growth is the result of a slew of acquisitions which helped it gain geographical access, into large untapped markets such as Latin America, South Africa and Europe along with a product acquisitions which gave it access to the American market. .

Sun pharmaceuticals established in 1983 is a leading MNE in the API and speciality pharmaceutical segment with 60% of sales from international markets. It used domestic

acquisitions to strenghthen its home base and following the traditional stage model has grown to have a presence in 30 countries.

Dr. Reddy’s laboratories, incorporated in 1984, has used acquisition and consolidation as a means of improving R&D performance and achieving the scale required to meet emerging competition. India’s top manufacturer in turnover and profitability, it began as an API manufacturer, but moved towards generics in the early 1990s. It has used a risky and aggressive strategy of developing high specialty generics, which involves invalidating existing patent or producing non-infringing process. It focused on product patents that were close to expiration and successfully reverse engineered their novel process technologies. It was the first Indian company to out license a new chemical molecule for clinical trials.

Aurobindo Pharma, incorporated in 1986 as an API manufacturer has shifted focus over the years to generics. It has made 3 overseas acquisitions aimed at market entry, value chain enhancement, product acquisition and capability acquisition. Its outward orientation strategy is mixed – subsidiaries in USA and Hong Kong, JVs in USA and China and a recent licensing deal with Pfizer, a leading global pharma major for manufacture of drugs to be marketed in US and European markets. Its outward orientation is positioned at Europe essentially as a de-risking strategy.

Nicholas Piramal India limited (NPIL) incorporated in 1947, renamed Nicholas Piramal in June 1988 was a relatively late entrant into the generics market. Its preferred strategic route of acquisition cum alliances has permitted it to enter the generics market with low process R&D expenditure, thus enabling them to target their own R&D efforts exclusively on New Chemical Entities (NCEs) and molecule discovery. Its alliances with global MNEs and generic pharmaceutical firms for contract manufacturing and custom synthesis has enabled them to avoid patent litigation with the Big Pharma companies in favour of piggybacking on their marketing expertise.

Wockhardt Limited was a similar late entrant into the generics market, with exports forming one third of its turnover. Its operations underwent a dramatic turnover under a new management in 1999. Five European acquisitions have made it the largest Indian company in Europe and alliances all over the globe have taken it to a position of global strength.

Dishman pharmaceuticals established in 1983 with a chemist and three operators as a specialty chemicals company used its capabilities in low cost manufacturing and process research to

emerge as the preferred outsourcing partner for global pharmaceutical firms. The firms stated strategy to emerge as a leading CMO and CRO partner has been realized through a combination of JVs and acquisitions.

Shasun Chemicals and Drugs limited, established in 1976 as a chemical company is a leading manufacturer of Ibuprofen worldwide. Following the stage model of internationalization, it has grown through a series of technical and marketing collaborations at different stages of the product life cycle..

THE RANBAXY AND ORCHID ALLIANCE

This alliance sets the scene for a shake out in the fragmented Indian pharma industry. . This may seem quite difficult but not impossible. The Indian pharmaceutical industry seems to be taking the first steps towards a much-awaited consolidation, with the hostile take over of Orchid Chemicals and Pharmaceuticals by Ranbaxy Laboratories finally settling into an amicable alliance. Another deal which firmed up was Dabur Pharma's sale of its oncology division to the German Fresenius Kabi. As more MNCs enter the Indian pharma market, Indian players will have to grow fast, organically or inorganically, to compete.

So is the consolidation of the Indian pharma industry finally on the horizon? Will this work? And are companies ready for this? These and many more questions need to be answered. Ranbaxy's deal with Orchid and indeed with at least three other Indian firms, could be set a precedent. Consolidation in the sector will significantly improve efficiency, increase scale and capacities of production and prevent duplication of facilities, feel industry experts.

RANBAXY AND ORCHID STRATEGIC BUSINESS ALLIANCE

To leverage respective strengths for mutually beneficial business growth

Ranbaxy Laboratories Limited (Ranbaxy) and Orchid Chemicals & Pharmaceuticals Limited entered into a Business Alliance Agreement on 22nd april 2008 involving multiple geographies and therapies for both finished dosage formulations and active pharmaceutical ingredients. Additionally, this agreement would establish a framework for enhanced future co-operation between the two companies.

"Orchid is a niche player in the global pharmaceutical industry with an impressive track record, particularly in sterile products. We are pleased to enter into this long term strategic alliance with Orchid. The agreement will be mutually beneficial and synergistic, allowing both organisations to leverage each others inherent strengths." 

Commenting on the alliance, Mr. K. Raghavendra Rao, Managing Director, Orchid, said, "We are happy to join hands with Ranbaxy, India's largest pharmaceutical company. Ranbaxy's global scale and market reach and Orchid's state-of-the-art development and manufacturing capabilities would expand the business of both companies. We believe that this will be a win-win arrangement for both companies”. 

About Ranbaxy:

Ranbaxy Laboratories Limited, India's largest pharmaceutical company, is an integrated, research based, international pharmaceutical company producing a wide range of quality, affordable generic medicines, trusted by healthcare professionals and patients across geographies. Ranbaxy’s continued focus on R&D has resulted in several approvals in developed markets and significant progress in New Drug Discovery Research. The Company’s foray into Novel Drug Delivery Systems has led to proprietary "platform technologies," resulting in a number of products under development. The Company is serving its customers in over 125 countries and has an expanding international portfolio of affiliates, joint ventures and alliances, ground operations in 49 countries and manufacturing operations in 11 countries.

About Orchid:

Orchid Chemicals & Pharmaceuticals Ltd. is a leading pharmaceutical company headquartered in Chennai, India involved in the development, manufacture and marketing of diverse pharmaceutical products. With exports spanning more than 75 countries, Orchid is the largest manufacturer-exporter of cephalosporin bulk actives and dosage forms in India and is ranked amongst the Top 5-cephalosporin producers in the world. It has a leading position in the US cephalosporin generics business.

Orchid has world-class, USFDA and UK MHRA approved API and dosage form facilities at Chennai and Aurangabad. Orchid has state-of-the-art GLP compliant R&D centres for API research, drug discovery and pharmaceutical research at Chennai. Orchid has ISO 9001:2000, ISO 14001 and OHSAS 18001 certifications. Orchid is listed on the National Stock Exchange (NSE), Bombay Stock Exchange (BSE) and the Madras Stock Exchange (MSE) in India. Additional information is available at the company’s website at www.orchidpharma.com 

STRATEGIC ALLIANCES IN INDIAN PHARMACEUTICAL INDUSTRY

Introduction

Alliances in business have a long history, but over the past couple of decades they have become an important feature of business organisation to such an extent that Dunning, a prominent researcher of multinational enterprises since the 1950’s, has described this new trend which gives increased emphasis to cooperation as well as competition between firms as ‘alliance’ capitalism. In his view this has been brought about by globalization and a series of landmark technological advances (Dunning 1995).

The pharmaceutical industry provides a good example of these developments. It has been subject to rapid technological change and significant restructuring. Pharmaceutical companies have been a prominent agent of globalisation, partly through international mergers but just as importantly in establishing global sales programs for their products. In addition the pharmaceutical industry, in which R&D is a core activity, has experiencedbreakthrough technological advances in biotechnology.

Dunning outlines five reasons for the growth of alliances arising from the impact of technological advances, several are particularly relevant to the pharmaceutical industry. These are to:enhance the significance of core technologies;increase the interdependence between distinctive technologies for joint supply of a particular product;truncate the product life cycle; andupgrade core competencies as a means of improving global competitiveadvantages.

Breakthrough advances in biotechnology has had a significant impact on core pharmaceutical technologies. Bioinformatics has resulted from the convergence of the distinctive technologies of biotechnology and IT. The impact of the shortening of the market exclusivity period has been to effectively truncate the product life of many new drugs. This both increased the pressure for additional drugs from pharmaceutical company product pipelines and intensified the search for new compounds from thebiotechnology companies. The alliance framework seems an obvious structure to satisfy the objectives of the research rich but cash poor biotechs and the better resourced but discovery hungry pharmaceutical companies.

Accordingly academic consideration of pharmaceutical alliances has focused on strategictechnology partnering (see for instance Narula and Hagedoorn 1999) between the funderof R&D typically a large pharmaceutical company and the biotech or university suppliersof technology.

In the view of Arora and Gamberdella (1990) technology alliances arise as a the result of:‘The increasing complexity and multi disciplinarity of resources required for innovation and of the stock of knowledge itself [which] tend to make technological innovations the outcome of interactions and cooperation among fundamentally autonomous organizations commanding complementary resources.’

Alliances had become such a feature of technology driven industries that in a more recent paper (Arora et al. 2000) remarked on the rise of ‘markets for technology’ in which smaller high tech firms supply specialised technologies to larger established companies using various forms of alliance structures.

The framework of incomplete contracts has been used to examine technology alliances (see Aghion and Tirole 1994) in which the relationship between a research unit and a customer for the research is analysed. In such a framework, a ‘research unit’ is characterised as performing the creative task while the ‘customer’ who expects to benefit from the innovation, provides the financing. The framework is used to predict that research activities are more likely to be conducted in a research unit independent of the customer when the intellectual inputs are substantial relative to the capital inputs and the customer is in a weak position because of a scarcity of research capability – a position increasingly found in the pharmaceutical industry.

Lerner and Merges (1997) have used this framework to undertake an analysis of a small number of biotech alliances to determine the balance of control of the alliance between the biotech (research unit) and established pharmaceutical company (customer). Their main finding, in keeping with the Aghion and Tirole framework, is that the biotechs ceded the greatest proportion of the control rights when their financial position is weakest. The study also examined which party was likely to control particular aspects of the alliances. This indicated that the pharmaceutical company was most likely to control the marketing and manufacturing aspects as well as the power to terminate the alliance.

The biotech was more likely to retain control over the patents and related litigation. While this work undoubtedly offers important insights into the nature of pharmaceutical alliances, there are some possible difficulties with this analytical approach. The first is that alliances are formed for many reasons, not just to transfer technology. Reflecting this the OECD has defined alliances in the following terms:‘Strategic alliances take a variety of forms, ranging from arm’s-length contract to joint venture. The core of a strategic alliance is an inter-firm co-operative relationship that enhances the effectiveness of the competitive strategies of the participating firms through the trading of mutually beneficial resources such as technologies, skills, etc.Strategic alliances encompass a wide range of inter-firm linkages, including joint ventures, minority equity investments, equity swaps, joint R&D, joint manufacturing, joint marketing, long-term sourcing agreements, shared distribution/services and standards setting.’ (OECD 2001)

Two surveys of alliances published in the early 1990’s reported that while sales and marketing alliances were 41% and 38% of all alliances respectively, R&D alliances accounted for only 11% and 13%. (Narula and Hagedoorn 1998). Indeed it might be expected that R&D activities would be too cloaked in secrecy, the IP considered too valuable, to trust to collaborative arrangements. The fact that R&D alliances appear to have grown rapidly since the 1980s indicates that some of these inhibitions have been overcome.

Moreover alliances are occurring within a broader context – one in which global firmshave been shedding ‘non core’ activities along and between their value chains as theyconcentrate on their ‘core’ competencies. Large multinational companies, which for decades have pursued various types of integration strategies, have found defining the boundary between

core and non-core functions a difficult process. It has required careful consideration of the advantages and disadvantages of outsourcing each function. Large global pharmaceutical companies have been as involved in this evaluation process as any of the large corporations. It has led some observers to suggest that the core competitive advantage possessed by global pharmaceutical companies is their organisational and resource management capabilities to develop and distribute new pharmaceutical products and that, not only research, but other functions such as sales and marketing should be outsourced using alliance and other structures (Kay 2001).

Alliance Technologies

It was suggested in the Introduction to this paper that one of the motivations for alliances is to gain access to new drug discovery and development technologies. The human genome project in particular has created firms with specialist sources of databases of information that can provide this on a commercial basis to other biotech and pharmaceutical firms. There are other technologies that can facilitate drug design or improving targeting. Others are supporting technologies. For instance gaining information (bioinformatics) is one of the fastest growing and most significant technology related reasons for entering into an alliance.

ReCap categorises alliances according to about 50 technologies. The database identifies the technologies involved in each alliance. As with other alliance attributes multiple technologies are possible for a single alliance.

Most strategic alliances and JVs within the Indian pharma industy are between small or mid sized pharmacos and one of the Indian Big Pharma firms. There are several instances of products being manufactured by one company and being marketed by another. The tie-up between Lupin Laboratories and Bharat Biotech is such a case in point. Therefore, "It is really a question of complementarity. At times there could exist situations that may give rise to potential conflicts thanks to common customers' etc, which prove to be a barrier to more such alliances," feels Utkarsh Palnitkar, Industry Leader and Partner, Healthsciences, Ernst & Young.

There have been instances of big Indian pharma companies taking a stake in relatively smaller companies such as the Ranbaxy-Zenotech, Ranbaxy-Jupiter Biosciences deals, and now the Ranbaxy-Orchid deal. These tie ups are more in the nature of strategic investments and would in the long run provide an impetus to both the investor, as well the investee company, adds Palnitkar. A few other deals in the list of M&As between the small and mid sized pharma companies would also include Hetero Pharma's acquiring Lyka's formulation business, Ipca and Ajanta's tie ups with Ranbaxy to sell their products in the South America, Maneesh Pharmaceuticals acquiring Kopran's brands, and Alembic's acquiring Dabur's non-oncology business, etc.

However, there are not many examples of tie-ups between the Indian Big Pharma companies. There could be many reasons but, D G Shah, General Secretary, Indian Pharmaceutical Alliance feels that, "One common factor is that no promoter is willing to pull out at this stage as most (promoters) think that they can still add value to their enterprise. That is also the reason why they

do not entertain any such moves from foreign companies. It is not that they are not approached. They do not entertain such overtures."

Currently, big domestic companies are in acquisition mode in the overseas markets, given the number of overseas acquisitions. Besides, for anything other than brands/business, acquisitions are not necessarily the most efficient way of doing business. It is at times more rewarding to build new facilities (ie. grow organically) than to acquire by paying a premium, feels Shah.

Industry experts have divided opinions on the 'condition' of the Indian market. Was India's situation (ie. fragmented market, dominated by owner driven companies) seen in pharma markets across the world, at any point of time and how did that market evolve? According to Shah, the pharma markets of Germany, Portugal and Italy show some similarity to India's.

But consolidation seems the only way forward. Dr Ajit Dangi, President and CEO, Danssen Consulting points out, "Historically many markets in developed countries evolved over a period of time through process of consolidation. The largest and one of the most successful healthcare companies in the world Johnson & Johnson (2007 sales—$61.1 billion, net income—$10.6 billion, stock price $66.5, market cap—$188.2 billion) is a case in point." Although founded by two Johnson brothers over 100 years ago, over a period of time it evolved as a family of companies (Janssen, Cilagchemie, McNeil, Ortho, Depuy, Cordis, Vistakon, Lifescan, Neutrogena etc).

A Harvard Business Review study shows that over 40 percent of M&A strategies have failed to create shareholder value.. The situation prevalent in India is unique in that India has the largest number of pharma companies in the world. To fully comprehend this, we must visit the way the market has evolved. Incentives provided to the SME sector lead to the proliferation of small sized units. The companies that started off in the eighties and nineties leveraged the same set of benefits in order to explore globalisation to its maximum. Changes in GMP requirements ushered in by amendments to Schedule M of the Drugs & Cosmetics Act, as well as the growing importance of international accreditations, made it imperative to achieve units of a minimum scale to justify larger investments. This has been further fueled by the change in the patent regime. The industry has turned a new leaf with the adoption of a globally harmonised patent regime in 2005. The domestic industry has evolved substantially and is in the process of transformation to an innovative research led business and being globally competitive.

Although Indian pharma industry has made phenomenal progress in the past one decade, domestic sales at $8 billion remain a paltry two percent of global pharma sales of $640 billion. Dangi feels that one of the reasons for this state of affairs is that apart from issues such as IPR, Pricing Policies etc, the industry is highly fragmented. With over 10,000 manufacturers and the market leader having a market share of less than six percent, the time has come for consolidation.

"Companies, which have a strong and fresh product portfolio, a good Intellectual Property pipeline (not only from the point of view of research but also strong brands), are vulnerable for take over," feels Dangi. Whether it is hostile or not will depend on the ambition and aggressiveness of the acquirer and the ability of acquirees to sustain such pressures. Even in Europe MNCs with one of the best product pipe lines like Roche have successfully staved off

overtures for a take-over. However world wide, many MNCs have succumbed to M&A fever for eg. Aventis, Parke Davis, Burroughs Wellcome, Smith Kline Beecham, Warner Lambert etc. "If India has to achieve the magic figure of $20 billion by 2015 in domestic sales, consolidation is inevitable," remarks Dangi.

Besides, it is not just promoters with minority stakes who are vulnerable. Any promoter with less than a majority holding in the company could also be a target for predatory activity. The next in line would be companies that are family promoted who would not want to give it up and move on due to emotional attachment, Parting with a business whose association dates back to years is understandably tough. "When an artist sells his art, it will remain as pretty and beautiful to him. You cannot negate his good work and the attachment," is how Anand Burman, Founder and Director, Dabur Pharma chose to explain his decision to exit the pharma space.

Besides reluctance on the part of promoters (mostly family owned),high valuation expectations have been the other factor preventing acquisitions/ consolidations in the domestic industry. Promoters believe their companies' hold more value than an objective outsider sees in them. Shah adds, companies in which the promoters do not having majority holding and are performing well or are operating in an exclusive space (plant approved by foreign regulatory authority, specialty product pipeline, etc) will be targets for acquisition.

Strategic alliances

Acquirer Acquiree Nature of deal

Lupin Rubamin Laboratories

Lupin acquired Rubamin Laboratories, a part of the Rubamin Group.

Zydus Cadila Liva Healthcare Zydus Cadila acquired 97.5 percent stake in Liva Healthcare

Hetero Drugs Lyka Labs Bought over Lyka Hetero Healthcare a JV of Hetero Drugs and Lyka Labs

Ipca Laboratories and Ajanta Pharma

Ranbaxy Laboratories

Tied up with Ranbaxy to sell their products in

South America

Maneesh Pharmaceuticals

Kopran Acquired Kopran's brands

Alembic Dabur Pharma Acquired Dabur's non-oncology business

Ranbaxy Laboratories

Jupiter Biosciences Acquired 14.9 percent stake

Ranbaxy Laboratories

Krebs Biochemicals

Acquired 14.9 percent stake

Ranbaxy Laboratories

Orchid Chemicals and Pharmaceuticals

Acquired a stake of approximately 15 percent

Ranbaxy Laboratories

Zenotech Laboratories

Ranbaxy Laboratories acquired a 45 percent stake

Nicholas Piramal Khandelwal Labs Acquired Anafortan and CEFI (cefixime) brands

While there seem to be many reasons for owner-driven companies pharma company to avoid take-overs, can they actually take steps to safeguard their companies and discourage takeover bids? Palnitkar believes there are countless textbook strategies that are followed. Amongst the more popular ones are 'Golden Parachutes' that give the top management of the target company large termination packages if their positions are eliminated as a result of a hostile takeover. Another strategy is dubbed a 'Poison pill', where the target company offers low-price stock to its current shareholders in order to make it more expensive for another company to buy them out. Some owners resort to locking up assets, in which the target firm sells off its most attractive assets to a friendly third party or spins off valuable assets into a separate entity.

Whereas, Dangi feels the only strategy pharma companies can adopt to thwart take-over bids is to have a majority controlling stake in the family. However, the downside to this strategy is that it will affect company growth due to lack of access to capital which will impact expansion. Eventually Darwin`s theory will come in to play, Dangi signs off

Ranbaxy which is one of the topmost pharmaceutical company in India was in the news papers frequently very recently. Ranbaxy making strategic alliances with some other pharmaceutical companies was the back of those news. As you know Ranbaxy is a company which is focusing

much on strategic alliances with good insight in the corporate strategies. With reference to some of the news came in dailies like Times of India and The Economic times I would like to mention about some of the strategic alliances came very recently in Indian pharma sector.

In the last month the news was on the strategic alliance made between Ranbaxy and Orchid pharmaceuticals. As per this alliance, Orchid would manufacture both finished dosage formulations, and active pharmaceutical ingredients (APIs) for marketing by Ranbaxy. Orchid is niche player in the global pharma industry with an impressive track record with lot of sterile products. Cephalosporins are the main products of Orchid (fifth rank in global cephalosporins production).

Relations between Ranbaxy and Orchid are not very cordial, and Orchid will feel that it has been pushed to a corner. Ranbaxy is expected to keep quiet for some time, but there are enough reasons to believe that it will prefer to gain control over the Chennai-based company i.e. Orchid in the medium-term. This may be the first step to acquire one of the emerging pharmaceutical company in India by Ranbaxy.

Now, Ranbaxy decided to make a strategic alliance with Merck, one of the global pharma giant for the drug development and research in a collaborative manner. Earlier it had made a contract with GSK also in the same stream. It is assumed that Ranbaxy will make revenue of over 50 million dollars from the alliance with Merck. Just like Ranbaxy, many Indian big pharmaceutical gies like Dr Reddy’s Lab, Nicholas Piramel followed the same path to make alliances in the R&D sector. The main reason for this attitude of the Indian companies is that these companies are aware of the fact that they had to go long way in R&D to sustain in the field.

Recently Nicholas Piramel also had a deal with same Merck to discover and develop cancer drugs which may bring them a revenue of about 350 million dollars! Nicholas has also signed with Eli Lilly for the drugs targeting metabolic disorders, where it could receive 100 million dollars in royalty payments. By seeing the huge figures we can understand the importance of strategic alliances in the Indian pharma business.

Mergers and Acquisitions are also a major part of the corporate strategies practiced by the Indian pharma firms.

CONCLUSION

The internationalization strategy of the Indian pharmaceutical industry is a combination of collaboration with acquisition driven by the desire to tap the profits from the generics market opportunity as well as build their R&D capabilities in order to be able to transition to becoming a drug discovery firm.

The results clearly indicate that for firms in this study overseas acquisition has asset exploiting characteristics. It is seen that the outbound M&A activity by the Indian pharmaceutical firms have a multiplicity of motives in which the market seeking and efficiency seeking motives dominate. In other words, Indian pharmaceutical firms were simultaneously diversifying their product and market portfolios as they were also striving to harness efficiencies arising from the M&A synergy.

Different paths have been taken to meet the challenges of the new regime. Firms like Ranbaxy, NPIL and Strides Arcolab have followed a conscious strategy and used all forms of international venturing for technology acquisition. Ranbaxy and Strides have emerged as top acquirers in the last few years. Others like Dishman Pharma have relied on the outsourcing model to emerge as a leading partner for various global companies based on capabilities developed in low cost manufacturing and process research. Dr Reddy’s laboratories has developed a strong research base and made its international expansion through initial exports to the less regulated markets like Russia and later into the developed markets of the USA.

The strategy of alliancing with MNEs has enabled NPIL and Wockhardt to leapfrog into advanced stages of drug discovery, which seems to be a cheaper strategy requiring fewer R& D resourcesThe changing strategic response of the Indian pharmaceutical industry as a consequence of changes in its competitive environment in the 1990s as a result of dual institutional changes of economic liberalization and changing intellectual policy regimes. Liberalization and its accompanying changes in trade, industry, foreign investment and technology policy regime, triggered previously protected Indian companies towards capability enhancement. This translated into a two pronged competitive strategy by the Indian firm - the adoption of a defensive strategy was aimed at protecting its competitive position in the domestic market and an assertive strategy aimed at leveraging new opportunities through internationalization. The industry’s strategic positioning began to combine elements of collaboration with competition to cope with the changing global environment.

The Indian pharmaceutical industry went in for M& A activity driven by the twin motives of efficiency and markets. The overseas expansion of Indian firms is related to its need to improve global competitiveness, acquisition of assets (including research and contract manufacturing firms, in order to further boost their outsourcing capabilities), move up the value chain, improve their product offering and consolidate existing market shares. Indian firms are consolidating their markets by acquiring generic firms in advance markets and creating business links with MNE pharmaceutical firms. Although India is a low cost location for drug manufacturing and process R&D, analysis suggests that Indian firms are acquiring assets in advanced countries to augment their current capabilities and set up business closer to customers. For example in case of bulk drugs MNC firms are currently outsourcing work on intermediates to Indian firms but are reluctant to outsource other work such as finding efficient processes for new or patent expired drugs even though Indian firms have excellent capabilities. Indian firms are responding to these challenges by setting up operations close to customers through the acquisition of western firms in

highly regulated Western markets. Thus these acquisitions are providing access to customers who may not have done business with Indian firms.

Indian firms are also trying to move up value chain by acquiring specific skills and technologies in advance markets. In high volume-low cost API market Indian firms are now facing competition from Chinese firms which can manufacture bulk drugs at a cheaper rate than Indian firms. Indian firms are using access to technology as a differentiating factor where competition on basis of cost has limitation.

Thus internationalisation of Indian firms motivated by creating links in advance markets to acquire R&D capabilities, regulatory skills and marketing and distribution networks. It is aimed towards further augmenting existing process R&D capabilities and further improving outsourcing capabilities. This is directly related to improving global competitiveness by increasing their product offering and moving up the value chain. These firms are competing in generic market and not in prescription based drugs market which is dominated by incumbent pharmaceutical MNEs. Thus new firms are not simply occupying spaces vacated by incumbents but instead creating new economic space for themselves. The changes in US generic market regulations and liberalisation of Indian economy have played key role in aiding Indian firms internationalisation strategies. The Indian pharmaceutical industry has capitalized on its past lessons to build its future strategies and gain a foothold in the global market.