Internationalisation Behaviour Using the of Ranbaxy - Case Study Example

Topic: Examine internationalisation behaviour using the case of Ranbaxy and assess which theory of multinational behaviour best explains the selected firm’s internationalization activities. Ranbaxy is the largest pharmaceutical company of Indian origin. According to Business Insights Limited (2006) Ranbaxy comes on thirteenth number out of the top 50 BRIC market firms. Its product sales in 2005 were at $210m. Research on generics and the novel drug delivery systems (NDDS) along with new drug discovery research (NDDR) has been the focus of Ranbaxy. The company’s BRIC market sales were 29% of the total sales in the year 2004-05 (IMS sources). Ranbaxy Laboratories, Generic Outlook (2001), is a publicly owned company that came into being in 1962. Traditionally involved in the manufacturing of pharmaceuticals and active pharmaceutical ingredients, it is making advances in researching new innovative drugs internationally. Ranbaxy has branched out in four global regions, namely India/Middle East, Europe/CIS/Africa, Asia-Pacific and North/South America. Forty countries encompass its marketing arm, buying Ranbaxy products. India being its biggest domestic market, its other big markets are China, Russia, the UK, Malaysia, Vietnam and the US. In international business, multinational pharmaceutical firms’ behaviour has been analysed and discussed by Jiang (2003). Firms have behaved differently in FDI mode, according to their share of ownership. Jiang has categorised the firms with less than 50% share of ownership – called minority joint-ventures (Minority-JV), firms with equal share of ownership (Equal-JV), more than 50% share of ownership (Majority-JV), and firms with 100% share of ownership (SV). The entry mode behaviour of firms with sole venture (SV) differs from firms opting JV mode, and it was also observed that the behaviour of JV firms was not similar, which hinted the suitability of each category of JV as an alternative to SV entry mode. Many earlier studies (Jiang, 2003) on multinational’s behaviour had focused on “market imperfection theory”, “location specific advantage theory”, “internalization theory”, “transaction cost theory”, “strategic behaviour approach”, and “resource based theory”. Off late, there have been attempts to interweave a number of theories into one structure, named as “eclectic paradigm” by Dunning[1988], according to which three factors played important role in deciding the choice of mode – ownership related factors of a firm, location related factors of a market, and internationalisation advantages of incorporating proceedings within a firm. Hill, Hwang and Kim [1990] formulated their “eclectic theory of the foreign entry mode choice” by integrating transaction cost theory, internalisation theory and strategic behaviour approach. Later Bell [1996] developed a new eclectic structure by adding resource based theory into Hill, Hwang and Kim’s eclectic mode. Empirical studies undertaken by using the Harvard Multinational enterprise Database show that there is a positive relation between establishing sole ventures with standard of the parent firms’ international experience, host country experience, parent firm’s size, marketing intensity of parent firm, research and development initiatives, asset features and assumed market capacity of the host country. Joint venture entry mode is suitable when there is cultural gap between the host and home countries; it depends on the host country’s welfare, government restrictions and the degree of competition in the host country. When firms opt for research & development intensive industry, they prefer joint ventures. There are other factors, which are crucial to the success of an international venture like host country’s environment, market production, parent firm’s home country, product, and resource dedication factors. Later, Kumar and Subramanian [1997] stressed on the importance of endogenous factors, affecting the choice of mode of entry. Managers of MNC’s face time and resource limits; their own opinions about the facts of the information and characteristics of the decision task also matter. Ziang (2003) has based his study on eclectic mode by submerging Kumar and Subramania’s contingency model and Root's [1994] and Meckler and Dolomite's[1997] conventional model into multinational pharmaceutical firms choice of entry theory. Taking note of the international behaviour theories described above in pharmaceutical industry, Ranbaxy has acquired an Irish generics company, Rima Pharmaceuticals, now called as Ranbaxy (Ireland) Ltd. in 1996. Ranbaxy boasts of not only joint ventures with companies like Eli Lilly Ranbaxy in India and Ranbaxy Schein Pharma LLC in the US, but also fully owned subsidiaries in the Netherlands, the UK, Egypt, Poland, Hong Kong and North America (Generic Outlook, 2001). According to Jiang (2003), joint venture mode of operation is suitable for research based companies. We find that research has been the important part of the company’s business strategy. Ranbaxy’s R & D capabilities are meant to provide long term competitive advantage. The 1,100 scientists are working in the company laboratories to bring it on top of the ladder of international research oriented pharmaceutical companies, as per company website. The company intends to capitalise on its proprietary prescriptions business through its NDDS and New Chemical Entity (NCE) research results. Ranbaxy recorded its first international success in NDDS technology in 1999 by licensing its once-a-day Ciprofloxacin formulation globally to Bayer AG. The company has been running its in-house NDDS programmes in collaboration. Ranbaxy started its R & D infrastructure in its home country quite early in 1973. It has three latest state-of-the-art multi-disciplinary research facilities developing generics and NDDR in home country, taking strategically right decision as human resource in the form of able scientists is available and cost of developing new drugs comes about one-third to one-fifth in comparison to a developed country . According to the report of Business Insights (2005), price optimization is very crucial factor of containing cost, which Ranbaxy is doing by putting its R & D resources in the home country, taking benefits of comparatively lesser cost to developed countries and using India’s pool of scientists. The pricing and reimbursement strategy is must to support investment in innovative drugs. In this regard, out of the five major pharmaceutical markets in the EU, Britain should be an ideal choice for a new product launch, as drugs there are permitted to enter into high value market. This enables companies to dictate prices without any hindrance of reference pricing. Ranbaxy set up Ranbaxy UK Ltd. (RUKL) in1996 to play an important role in its European operations. The company marched forward in the value chain of branded pharmaceutical category by launching Visclair (Mecysteine), a mucolytic agent to get comfort from Chronic Obstructive Pulmonary Disease (COPD) symptoms, such as cough and sputum, in the UK market, registering its entry in the respiratory brand segment. The Generics segment being the main support of Ranbaxy, with its three UK day-1 launches, it has touched a new high of sales worth US$ 50 Mn, succeeding in the pricing and reimbursement strategy . In the field of drug discovery and development, Ranbaxy has collaborated with GlaxoSmithKline Plc. It is running two research programmes; one in the field of anti-infective drugs and second in the field of COPD with GlaxoSmithKline Plc (Business Insights, 2005). The traditional base of Ranbaxy has been in therapeutic segments like anti-infective and gastro-intestinal drug segment. According to reports (Generic Outlook, 2001), it is enlarging its portfolio in cardiovascular, central nervous system products and nutritional category. Domestic market is centred on acute and chronic ailments. In Chemical Research and Fermentation section, (Generic Outlook, 2001), its strategy is to develop technologies for high value Active Pharmaceutical Ingredients (APIs) and intermediates requiring difficult chemistry. Ranbaxy has developed and commercialised processes for nine APIs, and patents process has already been active in India, the US and Europe. According to Business Insights (2006), Ranbaxy has tried to develop value added production facilities and ventured on low cost acquisitions, supplemented by soft dollar. The marketing strategy has been to focus on the US and European markets, at the same time focussing its research on anti-infective, urology, respiratory/inflammatory and metabolic diseases. Mundogen acquisition in July 2006 was Ranbaxy’s fourth acquisition of the year. It was done to enter the market of Iberia -- GSK’s Mundogen generic drug unit in Spain. It substantiates the company’s M&A strategy of aiming at the EU markets of significant geographical value. Presently, Ranbaxy markets 40 products to Spain, including simvastatin and ticlopidine. This deal is an extension of its generic product portfolio constituting 18 products in the therapeutic categories of cardiovascular disorders, CNS and pain management from Spanish pharmaceutical company Efarmes (Business Insights, 2006). Ethimed acquisition, happened in March 2006, has made the entry possible to Western European markets, facilitating 20 products along with important customer base, particularly among local pharmacies, enabling the company operations from Ethimed to Belgium. Terapia – the biggest independent generic company in Romania was acquired to get access to 70 prescription and non-prescription drugs – branded generics as well as OTC drugs. This acquisition also facilitated the buying of an in-house bio-equivalence facility and a low cost manufacturing unit, where Ranbaxy plans to shift its European manufacturing operations. This list of acquisitions has made it possible for Ranbaxy to strength its position in the high growth Central European pharmaceuticals and EU markets at a time when its margins are decreasing in the US market (Business Insights, 2006). In fact, when new opportunities on the horizon of pharmaceuticals appeared due to Hutch Waxman Act (1984) in the US and the New Patent Act (1999) in India, Ranbaxy followed distinct marketing, internationalisation and R&D strategies. Athreye & Kale (2006) have explained at length on learning ‘best’ practices by perceiving what other firms are doing. Due to the passing of Hutch Waxman Act, (Athreye & Kale, 2006) it was not essential any more for manufacturers of generic drugs to go through detailed clinical trials before marketing a generic drug. A show of bio-equivalence was enough to achieve a patent. Western market was attractive and Indian company Ranbaxy like others enjoyed low cost advantage in scientific force along with gaining the benefits of economies of scale by producing bulk quantities for big profits. Another important change was liberalisation and de-licensing of pharmaceutical sector by government regulations in 1990s. Further, congenial atmosphere was created with the entry of India to the WTO and the Indian government’s willingness to institute the intellectual property regulations necessitated by TRIPS. Further in 1999 in the home country, the 1970 patent Act was revoked. All these happenings created healthy atmosphere for the Indian pharmaceutical industry in general and Ranbaxy in particular – being the leading company. The gates of new opportunities were wide open to be exploited, requiring interim strategies to produce generics for the US and European market and get ready to face the loss of molecule supply by generating their “discovery capabilities” to exploit opportunities presented by patent law post 2005. Ranbaxy (Athreye & Kale, 2006) established its roots in the US market in 1988 by formulating a seven stage process for the production of Cefaclor and invested about $2m, coming out clean handed for producing Cefaclor, and gained better results than Eli Lilly’s original production process. The end story was a joint venture with Eli Lilly, which after break up, offered the opportunity of capturing the US market and creating brand value without any effort by purchasing exclusive rights to Eli Lilly products. The company strengthened its position in world generics market by registering on Luxembourg stock exchange and making acquisitions and investments. To safeguard its investments, Ranbaxy applied world wide for patents of its new product processes. The experience helped Ranbaxy to develop regulatory skills required to get approvals for its products under Para 2 of the Abbreviated New Drug Applications (ANDAs) scheme in the US. Conclusion—Ranbaxy Company is the quality example of step-by-step growth by consolidating on pharmaceutical production, R&D activities, and internationalisation efforts. It depended on national and international licensing and many international joint ventures and collaborations as means of getting technological advances. It was noticed that there was common thread of strategic behaviour of Ranbaxy and other Indian firms, struggling to remain in international competition with the strategies of the companies in the US during inter-war period. Like other Indian companies, Ranbaxy has followed the model of process development. Thus, we see that not a particular theory of multinational behaviour applies to Ranbaxy but a set of different theories like location-specific advantage theory, internationalisation theory, transaction cost theory, strategic behaviour approach and resource based theory were used to the advantage of Ranbaxy. References: Atreye & Kale, 2006, Experimentation with strategy in the Indian Pharmaceutical Sector, IKD working paper no. 16, viewed 28 February 2007. Business Insights Ltd., 2005, viewed 28 February 2007, . Business Insights Limited, 2006, viewed 28 February 2007, . Business Insights Limited, 2006, Report: Pharmaceutical Growth Opportunities in Brazil, Russia, India and China, viewed 28 February 2007, . Jiang, Fuming, 2004, ‘Sequence of FDI entry mode decision making process: new evidence from multinational pharmaceutical firms' FDI into China’, Journal of the Academy of Business and Economics, viewed 28 February 2007, . Ranbaxy Laboratories Limited, 2001, Research & Development, viewed 28 February 2007, . Ranbaxy Laboratories Limited, 2001, United States, viewed 28 February 2007, . Ranbaxy Laboratories Limited, 2001, Global API, viewed 28 February 2007, . Ranbaxy Laboratories Limited, 2001, Global Consumer Healthcare, viewed 28 February 2007, . Ranbaxy Laboratories Limited, 2001, United Kingdom, viewed 28 February 2007, . Seget, Steven, 2006, Pharmaceutical Pricing Strategies: Price optimization, reimbursement and regulation in Europe, US and Japan -- Business Insights, viewed 28 February 2007, . The Generics Outlook, 2001, viewed 28 February 2007, . Read More