Paper to be presented at the DRUID 2011

on
INNOVATION, STRATEGY, and STRUCTURE -
Organizations, Institutions, Systems and Regions
at
Copenhagen Business School, Denmark, June 15-17, 2011

Low Cost Pills or High End Innovation? Strategic Growth Options for Emerging
Economy Firms

Florian Tube
EBS Business School
Innovation Management and Entrepreneurship
florian.taeube@ebs.edu

Anu Wadhwa

anu.wadhwa@epfl.ch

Alexander Frenzel

afrenzel@de.imshealth.com

Amit Karna

amit.karna@ebs.edu

Abstract
We present an exploratory framework of organizational transformation and strategic renewal of emerging economies
firms faced with extreme turbulence in their institutional
Jelcodes:O32,F23
and regulatory contexts.
 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 firms

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 Mode of growth and innovative intensity

and national Organic Inorganic
context
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 firms 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 Financials 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

70

60

50
No. of deals

40 Inward FDI
30 Outward FDI

20

10

0
85

87

89

91

93

95

97

99

01

03

05

07
19

19

19

19

19

19

19

19

20

20

20

20
Year

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 M&A

alliances
Rx Gx Rx Gx Rx Gx
India Technology CSIR Cipla; Ranbaxy
Piramal Sun;
Biocon Glenmark
Production
Marketing Aurobindo
Global Technology CSIR DRL Neuland Jubilant; DRL;
Glenmark Advinus Cipla CSIR Lupin
Aurobindo Aurobindo
Production

Marketing Ranbaxy DRL; Elder; DRL;

Glenmark Lupin; Elder;
DRL Biocon; Glenmark;
Indoco; Claris Lupin
Glenmark
 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 Indias 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. Ranbaxys 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 Groups 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 Nestles 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 divisions 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 divisions 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 companys 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

Thomsons 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