Paper to be presented at the DRUID 2011
on
INNOVATION, STRATEGY, and STRUCTURE - Organizations, Institutions, Systems and Regions
atCopenhagen Business School, Denmark, June 15-17, 2011
Low Cost Pills or High End Innovation? Strategic Growth Options for EmergingEconomy Firms
Florian TäubeEBS Business School
Innovation Management and [email protected]
Anu Wadhwa
Alexander Frenzel
Amit Karna
AbstractWe present an exploratory framework of organizational transformation and strategic renewal of emerging economiesfirms faced with extreme turbulence in their institutional and regulatory contexts.Jelcodes:O32,F23
Paper submitted to the DRUID Summer Conference 2011 on
INNOVATION, STRATEGY, AND STRUCTURE ORGANIZATIONS, INSTITUTIONS, SYSTEMS AND REGIONS
Copenhagen Business School, Denmark, June 15 - June 17
B. Strategy, Organization, and Innovation
LOW COST PILLS OR HIGH END INNOVATION? STRATEGIC GROWTH OPTIONS FOR EMERGING ECONOMY
FIRMS
February 28, 2011
Abstract In this paper we present an exploratory framework that furthers our understanding of organizational transformation and strategic renewal of firms in emerging economies when faced with extreme turbulence in their institutional and regulatory contexts. We use the Indian pharmaceutical industry as an illustrative example in which firms are faced with disruptive industry level trends in the global pharmaceutical industry and extreme institutional changes in their domestic environments. This leads firms to different strategic responses which we explore with a mix of qualitative and quantitative data and illustrative case studies.
Keyword: institutional change; strategic response; growth trajectory; emerging economy firms; pharmaceutical industry; India
JEL – codes: O3; L2; F2
Low Cost Pills or High End Innovation?
Strategic Growth Options for Emerging Economy Firms
Abstract
In this paper we present an exploratory framework that furthers our
understanding of organizational transformation and strategic renewal of firms in
emerging economies when faced with extreme turbulence in their institutional and
regulatory contexts. We use the Indian pharmaceutical industry as an illustrative
example in which firms are faced with disruptive industry level trends in the global
pharmaceutical industry and extreme institutional changes in their domestic
environments. This leads firms to different strategic responses which we explore with
a mix of qualitative and quantitative data and illustrative case studies.
Introduction
Turbulent environments threaten the long term viability of firms and generate
immense pressures for strategic renewal and reconfiguration of organizational
resources and capabilities (Guth and Ginsberg, 1990). The process of strategic
renewal often entails fundamental transformation of existing organizational strategies,
structures and routines (Floyd and Lane, 2000), thus enabling firms to respond
positively to extreme environmental changes. While prior research has focused
extensively on how multinational firms in developed economies manage the processes
of organizational transformation when faced with environmental changes, we know
little about how firms in developing economies overcome the tensions created by their
rapidly globalizing competitive environment and the simultaneous upheavals in their
institutional contexts. Even though dynamism in the competitive arena has become
the hallmark of a rapidly globalizing world, firms in developing economies face
particular challenges in responding to the new competitive landscape than their
counterparts in the developed world. On the one hand, these firms face disruptive
changes in their already complex institutional environments which can erode their
existing capabilities and market share. On the other hand, they have to build and
leverage their resources to compete with multinational firms in domestic as well as
international markets. Despite these challenges, there is ample anecdotal evidence that
some firms from emerging market economies are successfully able to surmount these
challenges and pose a threat to multinationals from industrialized countries (The
Economist, 2007). Even though the data speak volumes about the innovative ability of
these firms to overcome high barriers to their survival and growth, greater theoretical
inquiry is required to gain insights into how they manage the dual challenges of
protecting their domestic markets and taking advantage of growth opportunities
globally during periods of changing institutional contexts (Li, Hitt, & Worthington,
2005; Chittoor, Sarkar, Ray, & Aulakh, 2008).
The limited research that sheds light on this topic has identified the pace of
institutional change, governance mechanism, embeddedness, organizational structures
and slow development of institutions and factor markets as critical factors that can
inhibit strategic transformation when the institutional environment of firms in
emerging economies changes (Filatochev et al., 2003; Newman, 2003; Peng & Heath,
1996; Spicer, McDermott & Kogut, 2000). Focusing on the firm and industry level
factors that facilitate strategic organizational transformation in changing developing
economies, Chittoor, Sarkar, Ray & Aulakh (2008) have conceptualized the rapid
internationalization of firms from emerging economies as an adaptive response to the
disruptive institutional changes in their domestic environment. Their research finds
that acquisition of international resources, contingent upon time and a firm’s
institutional embeddedness, are a fundamental means by which firms are able to
withstand and successfully overcome these forces.
Building upon this recent research, we argue that growth strategies can entail a
variety of options to adapt to their environment which we will elaborate on below.
These options include the mode of growth, innovative intensity; value chain stage and
national context. Since firms possess heterogeneous endowments of resources and
capabilities, they are likely to purse different growth strategies that need not be
mutually exclusive. In this exploratory study, we differentiate between growth
strategies composed by the dimension mentioned above and investigate how the
growth trajectory of firms evolves, contingent upon their existing strengths and
capabilities, and the performance effects thereof. Thus, we present a framework that
furthers our understanding of organizational transformation and strategic renewal
when faced with extreme turbulence in institutional and regulatory contexts of firms
in emerging economies.
The Institutional Context and Setting
We take the international pharmaceutical industry as the context for our
framework and examine the adaptive responses of Indian and foreign pharmaceutical
firms in India to institutional and regulatory changes in the Indian environment arising
partly from significant events that are altering the nature of competition in the global
pharmaceutical industry.
For example, on 11 June 2008, Daiichi Sankyo, a leading pharmaceutical
company of Japan announced the acquisition of a controlling stake in Ranbaxy, the
largest Indian one. The transaction values Ranbaxy at US$ 8.5 billion and is aimed at
creating a big pharmaceuticalb player that combines strengths in R&D-based as well
as generic drug development (Ranbaxy, 2008).1 This is only one of the latest
headlines from the international pharmaceutical industry which is undergoing a series
of dramatic technological and institutional changes that have already led to a decline
in its overall value from US$ 2 trillion to US$ 1.5 trillion (Ghemawat, 2007), and
pose serious challenges to – and opportunities for – industry players. While the Indian
pharmaceutical industry has a very small fraction of this huge market, its growth
potential seems more than proportionate.
On the technology front, the year 2005 marked the patent expiration,
particularly of blockbuster drugs (commonly defined as $1 billion in annual
revenues). This is challenging as the costs of new drug development are rising fast
and often cross the US$ 1 billion threshold accompanied by the rise in competition
from generics substitutes. Within a month of the expiry of these blockbuster drugs,
87% of its sales switched to generics (Langreth and Herper, 2006). This rise of
generics competition is further stimulated by the institutional change in national
health policies of most Western countries to cut down expenditure on drugs
(Bhandari, 2005).
Institutionally, the major change in India is a change in patent laws in 2005
from protecting only production processes to a product patent regime. As a member of
the General Agreement on Tariffs and Trade (GATT, now World Trade Association,
WTO) India entered the TRIPS agreement in 1994 with a 10 year transition period.
This period was granted to pharmaceutical firms in order to prepare for the new
situation of increased competition by foreign multinational pharmaceuticals. Until 1 We are not claiming that generic drug development does not entail R&D, but it does so comparatively less than drug development based on new products, molecules or compounds.
then, the intellectual property regime in India was not in favor of pharmaceutical
multinationals. In line with the general Indian policy climate of import substitution, in
1972 the government had introduced patents law and price ceilings which aimed at
protecting domestic firms and building an indigenous pharmaceutical industry
(Ramani, 2003). These changes, coupled with the liberalization of the Indian market
in 1991, created an environment that encouraged entry of foreign pharmaceutical
firms into India as well as created an impetus for the domestic firms to invigorate
their innovative capabilities to compete effectively in the new environment.
The implications of these environmental changes are manifold, and for Indian
incumbents they present an even more profound combination. Foreign MNCs are
increasing competition in the Indian market, because they are encouraged by their
national health systems to reduce costs and at the same time they can now enter India,
as a low cost market, with product patent protection hence no fear of reverse
engineering by Indian generics producers. Therefore, the ability of Indian firms to
compete seems diminished and the Indian pharmaceutical market now being a level
playing field. On the other hand, MNCs are searching for generics producers and
biotech firms since the mid-1990s to fill their product pipeline at both high and low
end as can be witnessed in the Daiichi-Ranbaxy deal.
In this paper, we focus on how these firms evolve to reach their aspirations of
becoming multinationals themselves and why these firms have different growth paths
contingent on different firm capabilities. Thereby, we complement recent research
showing that changes in economic policies, such as patent regimes can benefit
prepared firms at the cost of certain others (Athreye, Kale and Ramani, 2010).
Strategic options for Indian pharmaceutical companies
In this paper, we focus on how EEFs evolve and take on different growth
trajectories such as trying to become MNCs in their own right and why they follow
different growth paths contingent on different firm capabilities. We are interested
primarily in growth strategies of Indian pharmaceutical companies and we undertake
an exploratory study to analyse the dynamics of competition through the lens of these
firms. Our framework unpacks the blackbox of growth strategies to examine when
firms choose to follow a certain path and how this choice depends on their existing
capabilities. Adoption of growth strategies can vary depending on four dimensions.
First, growth may take place via several modes of growth ranging from organic to
inorganic. Second, growth strategies may involve an innovative intensity that may aim
at the high end of the spectrum of innovation (as in the case of new drug discovery) or
be concentrated at the low-end of innovation (as in the case of generic drugs). Third,
the growth can happen in a different stage of the value chain (from R&D to
marketing). Finally, growth can take place in different national contexts, namely a
purely domestic setting or internationally.
Modes of Growth. In principle, the mode of growth can take the shape of
pure organic or inorganic growth as well as intermediate form of JVs or strategic
alliances. Given the comparatively limited size of the Indian market and
regulatory requirements, most firms grow by acquisition or partnering, and rarely
through pure organic growth. For the case of Indian EEFs, we will show evidence
of partnering and licensing, as well as serial acquisitions, both domestically and
internationally, in different value chain stages and at different innovative
intensities.
Innovative Intensity. Growth may also involve varying degrees of
innovative effort. Firms that aim at the high end of the pharmaceutical spectrum
will need to develop the R&D capabilities in order to discover new drug
molecules and invest in building an infrastructure in order to take these molecules
through the clinical trials, manufacturing and marketing. On the other hand firms
may choose to concentrate on the low end by leveraging their existing capabilities
in generic drug delivery. We argue that firms that possess greater levels of
financial resources, have a strong position in the industry and have prior
experience with internationalization are also more likely to pursue the high-end
innovation than firms that do not have the same endowment of resources and
capabilities.
Value chain stage. Depicting the pharmaceutical value chain in a stylized
way, one can conceptualize research & development, manufacturing and
marketing as the major stages. Similar to the question of innovative intensity,
firms have to decide between developing an integrated value chain and focusing
on their core competence in one or more specific stages and covering the
remainder through inter-organizational relationships such as R&D alliances or
marketing JVs.
National context. Despite the impetus for growth via internationalization,
Indian pharmaceutical firms also need to focus on their domestic market, where
the rules of the game no longer protect the domestic firms from entry of
multinational pharmaceutical giants. Therefore, part if not all of some firms’
strategy has to be the protection of the home turf.
To summarize, there are different strategic responses available to EEFs
which answer their need for growth which need not be mutually exclusive but can
be combined. Conceptually, the different option can be visualized in a four-
dimensional matrix with a total of 36 cells. These options are shown in table 1:
Table 1: Strategic growth option for Pharmaceutical Firms
Value chain stage and national context
Mode of growth and innovative intensity Organic Inorganic In-house JVs, strategic alliances M&A Rx Gx Rx Gx Rx Gx
India Technology
Production Marketing
Global Technology
Production Marketing
In this paper, we are interested in the firm level capabilities on which
different growth strategies are contingent upon, how they affect the trajectory
firms may take and what performance effect this has. For each of the above
strategic growth options, we posit that a firm’s existing technological, marketing
and manufacturing capabilities, its existing financial resources, its relative
position in the domestic market and its prior experience with internationalization
is likely to play a role in the degree to which it chooses a mix of modes in order to
grow. We argue that, ceteris paribus, firms with more resources and capabilities,
a stronger position in the domestic market and prior experience with
internationalization will choose more integrative modes of growth (such as an
acquisition) and will undertake a greater degree of internationalization effort than
firms which lack these resources and capabilities. The extent to which each of
these factors plays a role in firm choice and internationalization is an empirical
question is not within the scope of this exploratory paper, but is a question that we
hope to examine in a future paper.
Empirical evidence
In order to assess the different strategies, we present a mix of qualitative and
quantitative data. Qualitative data is derived from content analysis of newspapers and
business magazines in both India (Mint, Times of India, Business Today) and abroad
(Business Week, Economist). These qualitative data are used to identify broad
patterns of strategies mentioned above used by both Indian and foreign
pharmaceutical companies in the Indian industry context.
In addition, we present preliminary analysis of descriptive statistics derived
from Thomson Financial’s SDC Platinum database on mergers and acquisitions
(M&A). We argue that M&A data, like foreign offices, are a complementary yet
stronger indicator of internationalization as it entails deeper commitment than
conventional variables such as international sales (cf. Chittoor, Sarkar, Ray & Aulakh
(2008)) as exports can be administered from home whereas foreign acquisitions
cannot. In theory, Greenfield investments as the complementary form of foreign direct
investment (FDI) could be used as well, but as argued earlier, because of regulatory
requirements this happens much less frequently. The data we use include all
transactions of healthcare firms, because this includes not only pharma but also
biotech and related industries between 1 January 1985 and 31 December 2007 with at
least one of the two parties involved, the acquiror or the target firm, being from India.
Finally, we use proprietary databases from IMS Health, a private data
solutions provider for the pharmaceutical industry. IMS Health collects sales data at
firm or therapy area level through a sample of 3,100 pharmacies stratified into 35
major metros and 14 states (excluding the metros) regional clusters. As an additional
stratification semi-rural and rural clusters are also considered. At the same time these
regional clusters are taking into account the socio-demographic environment. A
special focus is on Hospital stockists. A purposive selection is also done to ensure that
the company coverage benchmarks are met within each of the regional clusters. This
sampling frame enables utilisation the so-called stratification and purposive effect,
which reduces the statistical error compared to an unstratified sample of the same
size.
Based on these sales date, we identified 26 firms with at least 1% market
share. Out of this sample we then selected the fasted growing firms between 1998 and
2006 for in-depth case studies. The fastest growing Indian firm at that size level is
Ranbaxy (now part of Daiichi Sankyo) and the fastest-growing foreign firm is
Novartis of Switzerland. We use these case studies to illustrate various elements of
the strategies used in order to identify determinants of their success.
Quantitative Evidence
FDI is also more holistic as it combines asset/ resource seeking and market
seeking motives that can be disentangled according to the type of capability acquired.
Figure 1 gives an overview of the time trends from 1985 to 2007 of inward and
outward FDI involving Indian firms. As can be seen the institutional and technical
changes are reflected in strong increases in cross-border M&A activity in 1995 and
2005. Moreover, inward deals almost always outnumber outward investments, except
for the last two years.
FDI in Indian Pharma
0
10
20
30
40
50
60
70
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Year
No. o
f dea
ls
Inward FDIOutward FDI
What we can find looking at the data in more disaggregate fashion is the
different types of firms involved. Table 1 shows industries in which acquisitions are
made; most of investments stay within the pharmaceutical industry, primarily at the
low, generics but also at the high-end new drug development. Not surprisingly, only
few acquisitions are made in the biotech industry. This is not surprising insofar as one
would expect pharmaceutical -biotech linkages to come into effect primarily through
alliances and licensing rather than outright acquisitions. Depending on the
(pharmaceutical) industry life-cycle such M&A happens once biotech firms have gone
through certain stages of development and clinical trials.
Target industry No. of deals %
Pharma 239 77,35%
Other consumer products 12 3,88%
Biotech 9 2,91%
Healthcare equipment 8 2,59%
Professional services 7 2,27%
Chemicals 5 1,62%
Food and Beverages 5 1,62%
Household and personal products 4 1,29%
Limiting this analysis to acquisitions of pharmaceutical firms, we find that
most investments are made domestically as well as within the pharmaceutical
industry. Interestingly, outward acquisitions include both developed and emerging
economies, while inward M&A comes exclusively from developed economies (not
reported for space reasons). This reflects different acquisition motives such as market-
seeking as well as asset- and resource-seeking.
Target nation No. of deals %
United States 28 8,64%
United Kingdom 12 3,70%
Germany 9 2,78%
China 6 1,85%
Belgium 5 1,54%
South Africa 5 1,54%
Spain 4 1,23%
Italy 3 0,93%
Switzerland 3 0,93%
India 224 69,14%
Qualitative Evidence
As mentioned above, we present two types of qualitative evidence. Before we
move to the case study evidence, we present findings form newspaper analysis of the
years 2006-2010 to show some surprising patterns. The evidence is presented
according to the 6x6 matrix introduced in the previous section. Interestingly, grouping
strategic actions by Indian and foreign pharmaceutical firms in this table reveals two
striking points. Firstly, there seem to be no JVs or strategic alliances in the domestic
context, as covered by newspapers and business press. Given that M&A data from
Thomson cover equity participation starting at 5%, this might be a misrepresentation
and calls into question data collection by news agencies, calling for further cross-
checking and cleaning of available quantitative and qualitative data. Beyond data
issues, there might be strategic concerns on part of Indian firms in terms of
collaborating with close competitors compared to pooling resources and capabilities
with complementary (foreign) firms. Secondly, there are no production or marketing-
related growth initiatives in the product-patent (Rx) space, whether in India or in
efforts with foreign firms. As a caveat, these data need more careful scrutiny, hence
should undergo further, more fine-grained analysis.
Organic Inorganic
In-house JVs, strategic alliances
M&A
Rx Gx Rx Gx Rx Gx
India Technology CSIR Piramal Biocon
Cipla; Sun; Glenmark
Ranbaxy
Production
Marketing Aurobindo
Global Technology CSIR DRL Glenmark Aurobindo
Neuland Advinus
Jubilant; Cipla CSIR Aurobindo
DRL; Lupin
Production
Marketing Ranbaxy Glenmark DRL
DRL; Elder; Lupin; Biocon; Indoco; Claris Glenmark
DRL; Elder; Glenmark; Lupin
Case study evidence
RANBAXY Laboratories
Ranbaxy was started by Ranbir Singh and Gurbax Singh in 1937 as a
distributor for a Japanese company Shionogi. The name Ranbaxy is a combined word
from the names of its first owners Ranbir and Gurbax. Bhai Mohan Singh bought the
company in 1952 from his cousins Ranbir Singh and Gurbax Singh. After Bhai
Mohan Singh's son Parvinder Singh joined the company in 1967, the company saw a
significant transformation in its business and scale. His sons Malvinder Mohan Singh
and Shivinder Mohan Singh sold the company to the Japanese company Daiichi
Sankyo in June 2008.
With a sales of US $ 1.68 billion in 2008, Ranbaxy is ranked as India’s largest
pharmaceutical company. Ranbaxy & Daiichi Sankyo combined rank among the top
20 global pharmaceutical companies. As of 2009, Ranbaxy has a ground presence in
46 countries, although its products are sold in over 125 countries. Its manufacturing is
spread over 7 countries. Its 12000 strong workforce is derived from 50 different
nationalities. Since 2006, it has spent over $500 million on various M&A activities
within and outside of India. Refer to exhibit-1 for key financial information
Ranbaxy was incorporated in 1961 and went public in 1973. For the year
2008, the Company recorded Global Sales of US $ 1,682 Mn, reflecting a growth of
4%. The Company has a balanced mix of revenues from emerging and developed
markets that contribute 54% and 39% respectively. In 2008, North America, the
Company's largest market contributed sales of US $ 449 Mn, followed by Europe
garnering US $ 330 Mn. Business in Asia has been going strong with India clocking
sales of around US $ 300 Mn with market leadership in several business segments,
backed by strong brand-building skills. The international growth of Ranbaxy is
outlined in the exhibit-2
Strategy Using the finest R&D and Manufacturing facilities, Ranbaxy manufactures
and markets generic pharmaceuticals, value added generic pharmaceuticals, branded
generics, active Pharmaceuticals (API) and intermediates. It remains focused on
ascending the value chain in the marketing of pharmaceutical substances and is
determined to bring in increased revenues from dosage forms sales. Ranbaxy's diverse
product basket of over 5,000 SKUs encompasses a wide therapeutic mix covering a
majority of the chronic and acute segments. Healthcare trends project that the chronic
treatment segments will outpace the acute treatment segments, primarily driven by a
growing aging population and dominance of lifestyle diseases. In line with that,
Ranbaxy has presence in the following segments: in Cardiovasculars, Central Nervous
System, Respiratory, Dermatology, Orthopedics, Nutritionals and Urology segments.
This indicates its presence in the fast-growing chronic and lifestyle disease segments.
Ranbaxy is focused on increasing the momentum in the generics business in
its key markets through organic and inorganic growth routes. Growth is well spread
across geographies with focus on emerging markets. The Company continues to
evaluate acquisition opportunities in India, emerging and developed markets to
strengthen its business and competitiveness. Ranbaxy has forayed into high growth
potential segments like Biologics, Oncology and Injectables. These new growth areas
will add significant depth to the existing product pipeline.
R&D Ranbaxy views its R&D capabilities as a vital component of its business
strategy that will provide a sustainable, long-term competitive advantage. The
Company has a pool of over 1,200 scientists engaged in various research activities.
Ranbaxy is among the few Indian pharmaceutical companies in India to have started
its research program in the late 70s, in support of its global ambitions. A pioneering
world class R&D centre was commissioned in 1994. Today, the Company's four
multi-disciplinary R&D centers at Gurgaon, in India, house dedicated facilities for
generics research and innovative research. The R&D environment for both drug
discovery and development helps Ranbaxy to retain its leadership position in the
generics space offering value added formulations based on its Novel Drug Delivery
System (NDDS) and New Chemical Entity (NCE) research capabilities. The new drug
research areas at Ranbaxy include anti-infectives, inflammatory / respiratory,
metabolic diseases, oncology, urology and anti-malaria therapies. As of 2010,
Ranbaxy has 10 programs including one Anti-malaria molecule for which Phase-III
clinical trials have commenced in India, Bangladesh and Thailand. Ranbaxy has
signed collaborative research programs with GSK and Merck.
NDDS focus is mainly on the development of NDA/ANDAs of oral
controlled- release products for the regulated markets. Ranbaxy’s first significant
international success using the NDDS technology platform came in September 1999,
when it out-licensed its first once-a-day formulation to a multinational company.
International Expansion The new markets, like Japan and Mexico offer good potential markets to
Ranbaxy. With its own operations in the newly opening market of Japan, it has
become the first company from India to start operations in this market. Apart from
Japan and Mexico the focus is on emerging BRIC economies and South African
market. The company is expanding fast to capture market in these countries.
Alliances The Company has entered into a strategic business alliance with Orchid
Chemicals & Pharmaceuticals Limited involving multiple geographies and therapies
for both finished dosage formulations and active pharmaceutical ingredients. Orchid
is a niche player in the global pharmaceutical industry with a strong track record,
particularly in sterile products. With Ranbaxy's extensive front end presence, the
alliance is expected to be mutually beneficial and synergistic, allowing both
organizations to leverage each others strengths and capabilities.
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 20 pharmaceutical companies, globally. The transformational deal will place
Ranbaxy in a higher growth trajectory and it will emerge stronger in terms of its
global reach and in its capabilities in drug development and manufacturing. Ranbaxy
is driven by its vision to achieve significant business in proprietary prescription
products by 2012 with a strong presence in developed markets. The Company aspires
to be amongst the Top 5 global generic players and aims at achieving global sales of
US $5 Bn by 2012.
Novartis Novartis, meaning ‘new skills’ in Latin, was founded in 1996 from the merger
of two major pharmaceutical companies – Ciba-Geigy and Sandoz. The Novartis
Group is now a multinational group of companies, with a Swiss holding company
Novartis AG that holds 100% of all the operating companies of the group. Novartis
achieved a net sales of $41.5 billion in 2008, from continuing healthcare operations,
while net income amounted to $8.2 billion. The R&D investements were over $7.2
billion in 2008. Headquartered in Basel, Switzerland, Novartis employed
approximately 96,700 full-time equivalent associates as of December 31, 2008, and
has operations in approximately 140 countries around the world. For key financial
information refer to the exhibit-1
Novartis provides healthcare solutions that address the needs of patients and
societies worldwide. They do so with a broad portfolio that includes medicines,
preventive vaccines and diagnostic tools, generic pharmaceuticals and consumer
health products. The Group’s businesses are divided on a worldwide basis into the
following four operating divisions:
• Pharmaceuticals (brand-name patented pharmaceuticals)
• Vaccines and Diagnostics (human vaccines and blood-testing
diagnostics)
• Sandoz (generic pharmaceuticals)
• Consumer Health (over-the-counter medicines, animal health
medicines, and contact lenses and lens-care products)
Strategy Novartis’ strategy is to strengthen this healthcare portfolio through sustained
investments in innovation, as well as through targeted acquisitions. In April 2008, it
announced a significant agreement with Nestle S.A. providing the right to acquire
77% majority ownership of Alcon Inc. (NYSE: ACL) in two steps and add this world
leader in eye care to its portfolio. The potential value of these transactions was
approximately $39 billion. In July 2008, the first step was completed when Novartis
acquired a 25% stake in Alcon for $10.4 billion in cash. In the optional second step, it
had the right to acquire Nestle’s remaining 52% majority stake between January 2010
and July 2011.
Novartis completed the divestment of its remaining non-healthcare businesses
in 2007 with the sale of the Medical Nutrition and Gerber Business Units, which were
previously included in the Consumer Health Division. These businesses were sold in
separate transactions to Nestle S.A.
Pharmaceutical Division
Novartis’ pharmaceutical division researches, develops, manufactures,
distributes, and sells branded pharmaceuticals in the following therapeutic areas:
Cardiovascular and Metabolism; Oncology; Neuroscience and Ophthalmics;
Respiratory; Immunology and Infectious Diseases; and Other. The division is
organized into global business franchises responsible for the marketing of various
products, as well as the Novartis Oncology business unit, responsible for the global
development and marketing of oncology products. It is the largest contributor of all
divisions, accounting in 2008 for $26.3 billion, or 64%, of Group net sales from
continuing operations, and for $7.6 billion, or 77%, of Group operating income from
continuing operations (excluding corporate income and expense, net). The division is
made up of approximately 80 affiliated companies which together employed 53,632
associates as of December 31, 2008, and sell products in approximately 140 countries.
The product portfolio of the Pharmaceuticals Division includes more than 50 key
marketed products, many of which are leaders in their respective therapeutic areas. In
addition, the division’s portfolio of development projects includes 152 potential new
products, new indications or new formulations for existing products in various stages
of clinical development.
Although specific distribution patterns vary by country, Novartis generally
sells its prescription drugs primarily to wholesale and retail drug distributors,
hospitals, clinics, government agencies and managed healthcare providers. In the US,
certain products are advertised by way of television, newspaper and magazine
advertising. Novartis also pursues co-promotion/co-marketing opportunities as well as
licensing and distribution agreements with other companies when legally permitted as
well as economically attractive.
Novartis’ business strategy is intimately intertwined with its research strategy,
which combined extensive internal discovery and internal development leading to
organic growth with explicit external alliances and collaborations.
Research and Development Novartis is among the leaders in the pharmaceuticals industry in terms of
research and development investment. In 2008, it invested approximately $5.7 billion
in Pharmaceuticals Division research and development, which represented 21.7% of
the division’s total net sales. The Pharmaceuticals Division invested $5.1 billion and
$4.3 billion on research and development in 2007 and 2006 respectively. There were
over 150 projects in clinical development in 2009. The Research program of the
division is responsible for the discovery of new drugs, with a principal goal – ‘to
discover new medicines for diseases with high unmet medical need.’ The
Development program is focused to determine whether new drugs are safe and
effective in humans. The majority of company’s pharmaceutical research was carried
out at Novartis Institutes of BioMedical Research, which was headquartered since
May 2002 in Cambridge, Massachusetts and five ongoing locations around the world:
Basel, Switzerland; Horsham, UK; Emeryville (CA), US; East Hanover (NJ), US; and
Shanghai, China.
At the end of 2007, Novartis launched Project Forward to enhance
productivity and streamline decision making by eliminating unnecessary bureaucracy.
Targeted initiatives within the Divisions will generate significant cost savings and
realign resources to rapidly meet the needs of patients in a dynamically changing
healthcare industry.
Alliances The pharmaceuticals division of Novartis has formed alliances with other
pharmaceutical and biotechnology companies and with academic institutions in order
to develop new products, acquire platform technologies and access new markets.
Novartis licenses products that complement its current product line and are
appropriate to its business strategy. Therapeutic area strategies have been established
to focus on alliances and acquisition activities for key disease areas/indications that
are expected to be growth drivers in the future. Novartis reviews products and
compounds it is considering licensing using the same criteria as it uses for its own
internally discovered drugs.
Today Inspite of financial downturn, Novartis accelerated growth in several key
countries and regions, including the US, Germany and Asia-Pacific. 2009 was
particularly successful in the US, with three consecutive quarters of positive growth
and the successful remediation of the Wilson, NC facility. To facilitate ongoing
growth in key regions, Novartis continued to adjust our strategy and structure in
response to and in anticipation of specific market needs. (Refer Exhibit).
Conclusion
In summary, the Indian pharmaceutical industry is an example of EEFs
experiencing disruptive environmental changes which affect firm strategies and
capabilities that pertain to home market, finance and marketing. In this exploratory
study, we find that in order to cope with the challenges posed by this turbulent
environment, Indian firms acquire new capabilities to enhance performance in areas
such as marketing, production or R&D, both domestically and internatoinally.
However, the majority of growth-oriented actions by Indian pharmaceutical firms are
not necessarily targeted at high-end firm capabilities (Rx). Leveraging their existing
experience and expertise in “low cost innovation”, Indian firms also strengthen their
generics capabilities to target markets at the bottom of the pyramid where they seem
to have a competitive edge over developed country-firms.
To the best of our knowledge, this paper is the first one using a combination of
public data from company websites, annual reports, newspapers and databases such as
Thomson’s M&A as well as proprietary databases from IMS Health. However, while
this combination gives us unique advantages in terms of data richness, a lot of further
analysis is required in order to benefit fully from it. Moreover, limitations include
right-hand side truncation in 2006 when reactions to the change in patent law might
become more visible. Finally, being a rather empirical paper, in order to draw
generalizable findings for other emerging economy firms, deeper theoretical
grounding and operationalization of data is needed in the future.
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Exhibit-1: Key financial information
Exhibit-2: International operations milestone of XBR:
Year Milestone
1977 First Joint Venture was set up in Lagos (Nigeria)
1985 XBR research foundation established
1988 USFDA for one of its plant
1990 US patent for Doxycyline
1991 US patent for Cephalosporine
1993 Joint Venture in China and roll out of mission “to be international research
based pharmaceutical company”
1995 Acquisition in USA and USFDA to this plant
1997 Exports of RSs500 crores
1998 Entry into US market with ethical marketing
2000 Acquired business in Germany and entry into Brazil
2001 Manufacturing set up in Vietnam
2003 Entered Poland market
2004 Acquisition n France / entry into Portugal, Austria and Slovania / subsidiary in
Russia
2005 Joint Venture in Japan, Entry into Canada
2006 Acquired generic business in Italy and Spain
Exhibit-3 Financial Information of Novartis
Exhibit 4 Organization chart of Novartis
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