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Abstract
A number of firms around the world have been using strategic alliances to become more competitive globally. The reasons attributed to such alliances vary from economies of scale, increased revenue, cross selling, synergy, tax write-offs, diversification and resource transfers among others. After the liberalization of Indian economy in 1991, Indian companies have used these strategic alliances to expand into other markets and prepare for increased competition at home. But after joining the World Trade Organization in 1995, India had to change its patent laws by 1 January 2005 to meet its commitments under the WTO's agreement on Trade Related Intellectual Property Rights (TRIPS). In the post-2005 scenario, the pharmaceutical industry has undergone a significant change due to the TRIPS agreement. Though a number of reasons are attributed to these strategic alliances in literature, there is no particular pattern that can be observed in these alliances. This study aims at analyzing the Indian Pharmaceutical Industry and the strategic alliances in the recent past and what drives these alliances. A value chain framework has been proposed that analyses the critical capabilities needed along the value chain in the Pharmaceutical Industry, the existing capabilities of the firms and how these alliances are supposed to bridge the capability gap.
Introduction
In the last few years, strategic alliances have gained a lot of significance as a means of competing in the dynamic environment. Strategic alliances are tools used by firms to increasingly leverage their core competencies to establish a greater business impact. The benefits of these alliances are multifold, ranging from capitalizing on core com petenci i es, ncreasi fi m arket pow er,shari the i ng rm s ng nfrastructure, balancing the financial resources, maintaining growth and diversifying the risk. Though there are a multitude of reasons that might be motivators behind a strategic alliance, the question that arises is which factors dominate the emergence of strategic alliances between firms. It is obvious that motives for forming alliances vary from case to case. In fact, the participants may enter alliances for different reasons. The reasons for partners may vary in due course of time as alliances pass from one stage to another. Building on these hypotheses, one can argue that variations rather than similarities dominate the reasons for forming strategic alliances. But among these variations, can there be some pattern in the alliances that are formed due to industry structure. Putting simple, do industry structures and contexts drive a certain kind of alliances, is there a pattern? The objective of this study is to analyze how certain forms of alliances might be more prevalent in a certain industry structure or context and develop a framework whereby one can map a certain alliance structure onto the dynamics of the industry. We accomplish this by studying Indian Pharmaceutical Industry where we look exclusively at alliances between Indian companies and foreign counterpart. The next section looks at strategic alliances in general and in context of this study. A literature review is done to find some common ground in theory on this subject. The third section talks about the analysis of the Pharmaceutical Industry and introduces the value chain framework. We conclude in the next section by summarizing the key takeaways of this study and looking at further work that can be done in this area.
Strategic Alliances
Inter-organizational co-operation is spurred by the increased recognition of the fact that no f rm or organi on has al the capabii es, e. resources and acti ti needed i zati l lti g. vi es, f i to achi or t eve i goal or obj ves i the m arketpl ts s ecti n ace i today dynam i and n s c heterogeneous global market. Strategic Alliances is one class of widespread cooperative strategy that has gained a lot of visibility in last few decades. According to Miller strategic alliances refer to arrangements in which corporations join forces to form corporate partnerships creating a separate co-owned commercial entity. Thus an strategic alliance is a mutually beneficial relationship formed between two or more corporate firms to pursue a set of common goals or to meet specific business needs. It is an arrangement wherein organizations agree to co-operate with each other in a business area, each bringing different strengths and capabilities to the alliance. These are collaborative organizational arrangements that use resources and/or governance structures from more than one existing organization (Handbook of strategic management, hit et al, 2001). There are three important characteristics of any strategic alliance Firstly, the parent firms should remain independent subsequent to the formation of the alliance. Secondly, the arrangement possess the feature of ongoing mutual interdependence, in which one party is vulnerable to the other (Parkhe, 1993). Finally, because of the independent partners, an element of uncertainty exists as to the motives and actions of the other party (Powell, 1996). Thus various ways that strategic alliances have been defined may be different, with each definition concentrating on some particular characteristics of the phenomenon, yet there is some common denominator to which the above definitions can be reduced. In all the definitions, one realizes that firms are trying to develop some kind of exchange relationships with some significant others as a means to gain access to activities or resources that they lack. The exchange relationship with the external actors are a necessity for most firms since they provide access to complementary resources and activities that may have an impact on theory output/success in the marketplace. By forming strategic alliances, the partners pool their resources and strengths together in order to achieve their respective goals, a possibility of success that maybe impossible for each to achieve if they were to do it alone. Thus, the parties leverage their core capabilities by complementing each other in many ways.
translate into the stakeholders preferring to be loyal to them as with another firm. However, the costs of developing new products and/or new ways of offering complex sol ons to probl s f ng the custom ers i today dynam i m arkets m ay not be onl uti em aci n s c y be very high for a single selling firm to bear, the risks of failure of bringing innovative products and/or solutions are reported to be very high. Since the cost and range of technologies needed to operate in the market are high, firms are increasingly establishing exchange relationships with some other players as a means to complement each other. Firms can even go into alliances in order to block or co-opt competitors. Learning can be one of the main goals of forming the strategic alliances, though it can be formal or informal. When two parties are engaged in a strategic alliance, the aim of one the party or both can be to gain experience and to learn skills of the other partner and utilize what is learnt and the acquired experience in future operations. Other motives for strategic alliance can be overcoming the structural barriers in the industry. These may include legal barriers and market development. Barney2 identifies the following eight drivers that make firms enter into a strategic alliance of any kind:
o o o o o o o o
Exploiting economies of scale Learning from competitors Managing risks and sharing costs Low cost entry into new markets Low cost entry into new industries and new industry segments Low cost exit from industries and industry segments Managing uncertainty Facilitating tacit collusion
Together, the above eight reasons seem to cover all the various motivations that might drive a form into a strategic alliance.
(where one firm agrees to distribute the product of others). In an equity alliance, cooperating firms supplement contracts with equity holdings in alliance partners. In a joint venture, cooperating firms create a legally independent entity in which they invest and from which they share any profits that are created. For the purpose of the study, the strategic alliances are divided into the following types: Co-marketing Co-marketing alliances act as engines for growth in markets where it is not possible to invest capital resources easily. They help in overcoming the need to establish a strong brand by utilizing local firms that already enjoy significant brand equity. They also help in diversifying the risk associated with stagnant domestic markets. Preferred Supplier Relationship In several industries, the need to cut costs and improve quality at the same time has led to the formation of close relationships with selected suppliers. This allows for better quality control and improves the product function pf the firms, particularly in manufacturing sector. The availability of information technology solutions that help in better management of the supply chain has helped in development of such preferred supplier relationships. Research & Development tie -ups Another area where focus on getting better returns is becoming important is R&D. With increasing globalization, it is now possible for firms to tap superior R&D capabilities across the world through alliances rather than investing in their own R&D. Strategic Equity Investments In some industries, strategic equity investments in related businesses across the world help firms to get better returns for their capital when not many opportunities for growth are present. Joint Ventures Firms use joint ventures in order to enter new markets or product areas where they can create greater value by leveraging the combination of their core competencies, rather than going alone. They create a separate legal firm wherein both the partners invest and share the profits of any. Thus, the risk sharing is of a higher order in this form of alliance and in that sense it is also the most evolved form of a strategic alliance where both (or more) partners work very closely with each other. The above mentioned types of alliances can be classified along the dimensions of criticality and complexity in managing the alliance as follows:
Industry Structure
The structure of the Indian Pharmaceutical Industry is characterized by fragmentation, with over 20,000 players a large number of them in the small scale sector, only 260 in the organized sector. As a result, no individual market share in Indian retail formulations market exceeds 7%. However a trend of consolidation is visible at the top. In 2001, the top five players accounted for 22% while in 2006, they account for 28% of the market share. Also the top ten in 2001 accounted for 36%, and in 2006 they accounted for 42%. The pharmaceutical industry can be divided on the basis of form and therapeutic application. On the basis of form, the industry can be divided into bulk drugs and formulations, while on the basis of application, it can be divided into various therapeutic segments. Formulations occupy most of the market share. The anti-infective segment remains the largest in the Indian retail formulations market at around 25%.
Regulatory Environment
The pharmaceutical industry is highly regulated globally. The regulations governing the various aspects of the pharmaceutical industry can be clubbed under the following three heads: Patent regulations the Intellectual Property Right (IPR) protection provided to pharmaceutical products in a country has a bearing on the structure of the pharmaceutical industry and the nature of competition. The main legislation is the Indian Patents Act, 1970 and TRIPS agreement which has fundamentally changed the nature of competition in the industry. Price regulations The government of India introduced a price regulatory policy, Drug Price Control Order (DPCO) in 1970 with objective of protecting the interests of consumers. Under DPCO, 74 bulk drugs and formulations thereof are under price control. Product and Quality Regulations The Drugs and Cosmetics Act 1940, governs the import, manufacture, distribution and sale of drugs in India. The Drug Controller General of India (DCGI), an authority established under the Drugs and Cosmetics Act, oversees the conduct of clinical trials. Also responsible for approval and registration of drugs.
popularity. The companies have a large number of brands in their portfolios; the marketing is aggressive and fight for market share keen. Differentiated products and price controls make it tough.
many of them have reached capability levels that they believe can be leveraged internationally. Secondly with the product patent regime, it is clear that competition f rom M N C has becom e stronger i dom esti m arkets. So they must look for newer s n c markets to maintain profits and growth. The various opportunities facing Indian firms can be summarized as: Supplying to generics market of developed countries. Contract manufacturing for global majors Entering developing markets in South Asia and Latin America. Developing new drugs Manufacturing advanced intermediates and active pharmaceutical ingredients for global majors In their efforts to reach global markets, Indian firms have entered into International Strategic alliances with various pharmaceutical companies (See Appendix A and Appendix B).
Due to poor research and development, they have been able to develop new products. Thus, they need strategic alliances with firms that have expertise in these areas. Secondly when entering new geographic market, firms face entry barriers in terms of sales and distribution network. Pharmaceutical products require extensive sales penetration and relationship with doctors. It is difficult for a new player to build in a short time. Moreover, it requires considerable investment which is financially not feasible when Indian firms only have a few products abroad.
If we study the number of alliances mentioned, most (thirteen) of them are in market development and distribution alliances while four are for product development or research and development. Clearly, in their strategy to enter global markets, distribution alliances are forming the backbone of Indian firms. Aimed at boosting its OTC sales thus complementing its growing generics business, DRL has entered into an exclusive 15 year long product development and marketing agreement with Leiner Health Products (American OTC manufacturer). The key elements of the arrangement include an exclusive marketing partnership with Leiner, an Rx-to-OTC product pipeline and the development of private label OTC products. As an another example, in the alliance of Ranbaxy Fine Chemicals limited (RFCL), a wholly owned subsidiary of Ranbaxy Laboratories Limited with Mallinckrodt Baker Inc (MBI), RFCL will market MBI JT Baker and M ali lnckrodt range of scientific Laboratory s products in Indian market. This will help leverage the technological and product development capabilities of MBI and marketing and distribution muscle of RFCL. The integration of capabilities of the two partners will create a sustainable competitive advantage to enhance business prospects for these products and maximize commercial value. Through his alliance, RFCL will be extending high purity products and services for pharmaceutical, biotechnology, chemicals, research and development, electronics, environmental and healthcare industries. Besides offering the complete range of 5000 products of JT Baker and Mallinckrodt brand, RFCl will also cater to wide range of HPLC and spectroscopy solvents, ultra trace analysis of impurities, certified reference materials, bioscience products, chromatography columns and reagents. So we find that in this kind of a marketing contract, while one partner gets an easier access to a new market, the other partner gets a more complete portfolio of products for itself. Wockhardt (India) has strategic alliances with leading pharmaceutical and biotech companies, including Astra Zeneca Cell Therapeutics, Aguettant and Eisai. The company also entered in strategic alliance with Ranbaxy for Enalapril and ranitidine in US. It has tie up arrangement with IVAX Pharmaceuticals Ltd, UK for marketing generic products. It has also strategic alliance with Eisai of Japan for marketing of methycobal. Eisai and GSK have signed a co-promotion agreement to market the Eisai flagship antiulcer Paritec in India. The company expects to launch new drugs over the next three years and Eisai's presence in India would be important for the com pany global plans. In s this alliance, GSK's strong field-force was seen as one of the vital drivers behind the deal. Nicholas Piramal India Ltd (NPIL) entered into alliance with Canadian biotech company BioSyntech through private placement of common shares. The arrangement has also given NPIL exclusive rights for marketing, sales and distribution of current and future BioSyntech products in India, Pakistan, Sri Lanka, Bangladesh, Laos, Cambodia, Vietnam
and the Philippines. The partners have also agreed to also explore collaboration opportunities for R&D initiatives. Government Run Research Organizations in India have been building their industry alliances and collaborations for pure Research and development purposes (See Appendix C). The industrial houses in the Indian pharmaceutical sector have been more and more forthcoming in forging alliances with the drug research institutes like CDRI (Lucknow), IICT (Hyderabad) and CCMB (Hyderabad). So we can conclude that it is those critical success activities of the value chain of pharmaceuticals industry where Indian firms do not have the necessary capabilities to enter global markets that they look for strategic alliances. Most firms are currently focusing on their short term need of having quick access to these markets and entering into marketing and sales alliances. But a few firms are looking to build long term capabilities and entering into Research and Development Alliances.
Conclusion
Strategic Alliances are increasingly becoming one of the most potent tools, firms are employing to become globally competitive. It remains an intriguing task to determine the patterns in various alliances being forged around the globe. This study tries to understand strategic alliance in the context of the industry they are taking place in. The analysis shows that industry structure and dynamics have a profound affect on the kind of alliances emerging in an industry. Though each alliance is different in its own unique way, yet there is a broad but definite pattern in the alliances of a certain industry. A value chain framework has been proposed that analyzes the critical capabilities needed along the value chain of an industry for firms to succeed, existing capabilities of the firms and how the strategic alliances they enter into is an effort to bridge the capability gap. The dominant nature of alliances is driven by specific requirements of its value chain. The different reasons behind such alliances have shown an important shift towards the Research and Development alliances and Product Development initiatives rather than concentrating solely on the marketing and sales/distribution concerns as was the case before TRIPS (2005). Thus in the post-2005 scenario, the pharmaceutical industry has undergone a significant change due to the TRIPS agreement. Substantial scope for further research is possible in this area. More industries can be looked into, to further verify the value chain framework. This study was constrained by limited data on strategic alliances, particularly of Indian firms. With better data, advanced analysis on the performance of various alliances to discover of a certain kind of alliance performs better in a certain industry. This had further strengthen the framework.
Appendix A
Table of the partnering firms in the Indian Pharmaceutical sector Indian Partner Pall Pharmalab Filtration Pvt Ltd Ranbaxy Laboratories Ltd Foreign Partner Euroflow Ltd, UK Description of Alliance D i buti ofEurof ow stri on l s Chromatography products and technologies in India Sales Support to Ranbaxy D i s sperM ox, amoxicillin tablets for oral suspension in USA M arketi ofW ockhardt ng s bethanecol chloride tablets in USA Nature of Alliance Sales and Distribution Contact Sales and Distribution Contact
Blansett Pharmacal Co., Arkansas, USA Ranbaxy Pharmaceuticals Inc., Princeton, New Jersey, USA Apotex Corp, USA
Wockhardt Ltd
Sal ofO rchi s generi es d c Market Development, cephalosporin and other Sales and Distribution injectable products in USA Contact Drug Research and development in Biotechnology area Development of New Chem i enti es ( CE cal ti N s) or new drugs in the area of urology, anti-fungal, anti bacterial and metabolic disorders Marketing of a number of Dabur products in the USA on an exclusive long term basis RFCL will market MBI JT Baker and M ali lnckrodt s range of Scientific Laboratory Products in the Indian market Wockhardt markets Methycobal in India NPIL markets Avonex for multiple scelorosis in R&D alliance
R&D alliance
Market Development, Sales and Distribution Contact Market Development, Sales and Distribution Contact
Wockhardt Ltd
Nicholas Piramal
Market Development, Sales and Distribution Contact Market Development, Sales and Distribution
Capellon Pharmaceuticals, Fort Worth, Texas, USA Ranbaxy Pharmaceticals Inc, Princeton, New Jersey, USA and Wockhardt Americas Inc, New York, USA Arrow Group, Canada
India and Nepal Fifteen year exclusive product development and marketing agreement for Lenier to market Dr Reddy products i U SA s n Exclusive comarketing and development agreement covering fourteen generic pharmaceutical products, Par m arkets D r.Reddy s products in USA Sales and Marketing Support to Ranbaxy s Raniclor, anti-infective Cefaclor tablets in USA Multi product development, sales/supply and marketing agreement
Market Development, Sales and Distribution Contact Product Development and Marketing Alliance
Appendix B
Select Contract Manufacturing Deals in India
Foreign Partner Fujisawa Apotex Allergan Advanced Medical Optics Ivax Solvay Pharmaceuticals Merck Tillomed Apotex Eli Lilly Synpac Pharmaceuticals Altana Pharma
Product Cefixime Cefuroxime, Axetil, Lisinopril (Bulk) Bulk and formulations Eye Products Nizatidine (anti-ulcerant) Eprosartan Mesylate Bulk Drugs Atenelol Cephalosporin and other injectables CVS Products, anti-infective drugs and Insulin Penicillin G Bulk Drug Intermediates for Pantoprazole Gastrointestinal and CVS Products Bulk Drugs
Nicholas Piramal Wockhardt Dishman Pharmaceuticals IPCA Labs Orchid Chemicals Pharmaceuticals Sun Pharma Kopran
Appendix C
Government Run Research Organizations: Industry Collaborations CDRI (Lucknow) Novo Nordisk, Denmark Krebs Biochemicals Ltd., Hyderabad Avon Organics Ltd., Hyderabad Cipla Ltd., Mumbai Dabur India Ltd., Ghaziabad Duphar Interferan Ltd., Mumbai Hindustan Latex Ltd., Thiruvananthapuram IPCA Labs Ltd., Mumbai Lupin Laboratories Ltd., Mumbai Malladi Drugs and Pharmaceuticals, Chennai Nicholas Piramal India Ltd., Mumbai Lumen Marketing Co., Chennai Ranbaxy Laboratories Ltd., New Delhi Themis Medicare Ltd., Mumbai Torrent Pharmaceuticals Ltd., Ahmedabad Unichem Laboratories Ltd., Mumbai Wockhardt Ltd., Aurangabad IICT (Hyderabad) D r.Reddy Laboratories, s Hyderabad Lupin Laboratories Ltd., Mumbai Cadila Laboratories Ltd., Ahmedabad SOL Pharmaceuticals Ltd., Hyderabad Neuland Laboratories, Hyderabad Sun Pharmaceuticals Ltd., Mumbai Cipla Ltd., Mumbai Nectar Laboratories Ltd., Hyderabad Orchid Chemicals, Chennai Trident Labs Pvt. Ltd., Hyderabad Unichem Laboratories Ltd., Mumbai Armour Chemicals Ltd., Mumbai Bombay Drug House, Mumbai Cheminor Drugs Pvt. Ltd., Hyderabad Torrent Pharmaceuticals Ltd., Ahmedabad Coromandal Pharma, Hyderabad IDPL, New Delhi CCMB (Hyderabad) Shantha Biotechnics Pvt. Ltd., Hyderabad D r.Reddy Research s Foundation, Hyderabad Bangalore Genei Pvt. Ltd., Bangalore Dabur Research Foundation, Sahibabad Biological Evans Ltd., Hyderabad
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