Case Study

dancing with strangers
by rekha krishnan
this case was published in the jan-mar 2002, Q102 issue of The Smart Manager.

the case
Reading the latest cover story on the Anthrax scare brought an irked look on Dr Anjan Mehta's pleasant face. Of late, newspapers and business magazines had intensified the debate on patents and pharmaceutical companies. The World Trade Organization's (WTO) approaching deadline on product patents in 2005 was overshadowed by the threat of global biological warfare. The Anthrax attacks in cities as far flung as Washington and Nagpur were but the beginning of a new world order.

For years, India-based Nimax Laboratories had been waiting for the opening up of the $30 billion world generics market when nearly 60 blockbuster drugs would go off patent. The world wide biological attacks had shaken the concept of patent protection among government officials, especially in the US after the destruction of the World Trade Centre (WTC). As Anjan flipped through the cover story in India's top management magazine, the 50 year old CEO of India's leading pharmaceutical company chuckled as his eyes fell on his gleaming face in print. Anjan was used to reading business journalists debate about Nimax's post-WTO and post-WTC strategy and on how Nimax could take advantage of the lucrative generics market, a decision he had been postponing for the past few months.
the opportunity
Nimax is an ambitious Indian multinational that aspires to be a research based world class global pharmaceutical company. It aims to move up to the highest - and most profitable - level of the pharmaceutical value curve through the discovery of new drugs. By 2001, Nimax was making some headway by venturing into novel drug delivery systems (NDDS). Anjan recalled how Nimax first broke into the international market place by producing and selling the bulk substances and intermediates that defined the bottom end of the curve. This segment still brings in the major chunk of Nimax's revenues, accounting for nearly 35% of its sales. He glanced at his Swatch, it was already 5 p.m. Drinking his espresso, he reached for his receiver to call Sunil Desai and Rakesh Sharma. "Let's discuss the generics issue. We can't delay much more."

Rakesh Sharma (39), Vice President R&D, and Sunil Desai (40), Vice President International Relations have been Anjan's close associates for many years, often coming up with brilliant and sustainable solutions when faced with difficult situations. "I am happy that the generics opportunity has finally sunk into you," remarked Sunil as they walked in through the wide open door of Anjan's office. "Anyway, don't get too worked up about it," Rakesh added, pulling up his chair.
Anjan loosened his tie as he began, "It's true that the WTO regime - aided by the Anthrax scare - will throw open the entire generics market, but I'm sure it's going to be highly competitive and competition will come from several countries. Besides, for an ambitious company like Nimax, stepping into the US generics market means going back down the value curve. That actually worries me." As he finished, Anjan's mind quickly rewound to the past. He recalled his company's difficult climb from commodity generics to conventional dosage forms and their hopes that their investments in the new research facility would soon deliver a new molecule. Would an American foray lead Nimax back to square one or would it open up new horizons?

Sunil broke the short silence. "Hey, you sound like Hamlet to me," he smiled. "How wise can it be for us to let go this golden opportunity? The $29 billion generics market is expected to grow at double digits over the next 5 years. Compare that to India's sluggish 5.5%. Once we have a US operation, we'll get to know about opportunities which we wouldn't even get to hear about in India. Look at our South East Asia subsidiary. The very fact that we set our foot abroad gives us a clear competitive edge over others. Since early birds in the generics market with some international experience are likely to gain in the long term, it's time we take a concrete decision". Rakesh nodded in agreement.

"The generics market is a high volume one with low margins…as low as 3- 4%. Are we efficient enough?" Anjan turned to Rakesh. Rakesh's response was prompt, "More than many others. With the kind of capabilities we have built up over the years, I believe we have a bright future there. We have the process development skills, the cost efficiency and our recent product introductions have been well received," he expanded, tapping his Parker pen on the desk to emphasize each point. "These, I'm sure will take us places".

There was silence on Anjan's side and years of experience in dealing with him had taught Rakesh how to interpret it. Anjan simply needed more explanation. "Well," began Rakesh, "We are leaders in India and our experience in process development should ensure a relatively smooth sail in the US generics sector. Not many of our competitors enjoy as low a manufacturing cost base as we do. And we've learnt how to identify and control costs. US companies are not as lean as us. On the issue of entry strategies, we have already established one company overseas albeit in an emerging market. More importantly, our reputation of being able to work with international companies will help. These experiences can be used effectively to gain entrance into the generics market and eventually tighten our hold there. Most of this generics activity is going to be in the US. In fact, with sales of nearly $19 billion, the US accounts for 65% of the world generics market! Aren't these good enough reasons to enter the generics market?" Rakesh eagerly pulled his chair forward shifting glances at the duo, gauging their reactions.
alliance as surrender
Anjan smiled, seemingly with approval. All three were proud of Nimax's hard won achievements. But Anjan wasn't sure about the degree to which Nimax should get involved in the international generics market: should Nimax be aggressive or moderate? "Why don't we take up offers from MNCs abroad for contract manufacturing?" he asked in a low tone. Rakesh was clearly unhappy with the suggestion, exclaiming, "Hey, that would be a low profile, risk adverse strategy for a forward looking company like Nimax. This would never fit our overall strategy of achieving global leadership. At the least, we should go for something that matches our vision!" Anjan expected that from Rakesh. He looked at Rakesh, silently inviting an alternative option.

Rakesh got the message and immediately burst into speech. "Why don't we capitalize on our experience in the US and go it alone? We can start a wholly owned subsidiary abroad." "Hold on, hold on," Sunil interrupted him. "Are you really serious? We are going it alone? Do you know the size of investments needed to set up the distribution and marketing infrastructure? Besides, we would be competing with global leaders in a lesser known terrain! With due respect to all our capabilities, I doubt whether we could handle that option." Sunil's opposition to Rakesh's proposal allowed Anjan to breathe easier. The idea was too radical, especially compared to the low profile strategy he had proposed.
"Do you have something in your arsenal?" Rakesh probingly asked Sunil. Sunil cleared his throat as he began. "Why don't we work with others? I'm pretty sure this is a workable and realistic option." Both Anjan and Rakesh appeared confused. Sunil explained, "I propose we enter the generics market abroad through an alliance with a local pharma company there. One which has good local market knowledge and contacts. The tie-up would give us access to a large and growing market yet at the same time would reduce our risk of going it alone. We would get the best of both worlds."

Rakesh had doubts and he didn't hesitate to raise them. "Alliances are dicey. Don't forget that we may be tying up with the same kind of MNCs we see here in India. Initially, as the business gets into its groove, the going is smooth for both partners. Once things are settled and the MNC gets to know his way around the country, he starts thinking of the Indian side as a liability. One day he will walk into the boardroom with his laptop and make a solemn presentation that the company desperately needs to grow. Fresh funds need to be pumped in. The Indian side usually cannot pay up, greenbacks are brought to the table and then you know what happens. They easily gobble the Indian share up! Now your point, Sunil, would make absolute sense if we could replicate the strategy of the foreign MNCs in India but on their home turf. In fact that would allow us to attain true global leadership. Don't also forget that we too have had frictions with the foreign partner in a couple of alliances in India."

Sunil was unperturbed. "Listen Rakesh alliances fail - as we've discovered to our cost! - due to a poor strategic fit between the partners. The financial muscle, the aggressive growth strategy of the foreign MNC and their superior learning abilities becomes too much for the Indian company to handle. Today, we could actually try to turn the tables - we could be the MNC, use the same strategies on a US company. To be precise, we need a partner who doesn't want to - or can't - make large investment, has good local market knowledge and a slow learning capacity."

The argument seemed convincing to Rakesh. But Anjan had a question, "Does such a partner, one who is prepared to aid us in our pursuit of global leadership, exist?" Sunil continued rocking his chair while responding, "Luckily for us, there are financially weak companies in the US with the required local knowledge and contacts, and who are looking out for partners with the kind of capabilities that Nimax has." "Why don't you name a few?" that was Rakesh. "Well," said Sunil, "I'll have to do my homework here. I have a couple of companies in mind. Give me another 14 hours and I'm sure to hit upon the right target. Tomorrow I should be able to present the strategic reasons for choosing that partner too."

Anjan heaved a sigh of relief. "In that case, I'll set up a management review meeting first thing in the morning tomorrow. Sunil, you can then introduce the potential alliance partner and present the strategic rationale for choosing the company too," said Anjan as he hurriedly clicked shut his IBM think pad. Sunil and Rakesh nodded approvingly. It was already 7 p.m. and Sunil knew he had an important task before him. "Relax, I'm sure you'll come up with something interesting tomorrow," Anjan patted Sunil as he got into his new C-class.
dancing with strangers
The day dawned for Sunil and he was still narrowing down his choices. An hour before the 10 a.m. review, he was carefully arranging a bunch of papers. On time as usual on time, he spotted Anjan and Rakesh among the many eyes eagerly awaiting his presentation. He was relaxed, confident that he had come up with the right choice.
He kick started his presentation with a brief introduction on the need for the day's meeting. "As all of us know, the post-WTO and post-WTC situation has opened up an estimated $30 billion generics market. And before one more business magazine starts digging into our potential strategy, maybe we should have one of our own. All of us in the room today having been thinking about our options. Yesterday Anjan, Rakesh and I discussed the possibility of entering the generics market through a strategic alliance with a company located in the US. This, we think is a viable solution. I had promised to come up with a target company whose strategic interests would match that of ours and at the same time would help us gain global leadership. I'm here before you to present the same."

He stopped for a second to have a sip of water and continued, "Our target is Prima Pharmaceuticals based in Ohio. Prima is a drug discovery and development company whose lead product for prostate cancer is in clinical trials now. They have a well-established distribution network. Since they don't deal with generics, our partnership with them would be complementary. Also our products wouldn't have to fight for shelf space. Additionally Nimax can learn from their drug discovery and development skills. It's an ideal fit, I would say as there's likely to be better strategic compatibility."
"Now coming to financials. For the 6 months ended 30 June 2001, Prima's sales fell 70% to a record low of $5.7 million. Compare this to Nimax's sales figures of $358 million. Prima is a much smaller company than we are, and weaker. This means that they are would like to keep investments low and yet are driven by the need to grow. Prima's market capitalization is $193 million which is very low compared to our market cap of over a billion dollars. This gives us a clear edge in the price while fixing the deal. Their brand name isn't all that impressive. So we can either co-brand our products or sell it under our own brand name. I favor the latter. Their poor results reflect the unsatisfactory performance of the company's corporate collaborations."

"I got to know from trusted sources that Prima is looking for a collaboration partner with a good brand image, complementary products and a fairly good financial position. All their earlier collaborations were with partners who operated in their same market segments. They perfectly fit our bill. Prima is the kind of partner we are looking for in order to achieve our dreams of global leadership. I leave the rest to your discretion", Sunil wiped his forehead as he awaited responses from the group. Anjan and Rakesh seemed to favor his choice.

Even before Sunil could relax, approval came from Monica Shah, Nimax's young and dynamic Marketing Manager, "It would be great to gain access to a readily available distribution and marketing infrastructure. We could penetrate the American heartland soon". "We could capitalize on our brand image too. I favor Sunil's suggestion about selling the products under the Nimax brand name," quipped Deven Shenoy, the Advertising Manager. Ashok Gupta, the Operations Manager too seemed to approve of Sunil's choice and strategy, "I'm sure we can capitalize on our cost efficiency and excellent process development skills which are indeed the need of the hour". "Prima seems to be a small company with not much financial strength. This alliance could act as a prelude to an acquisition," exclaimed Monica. Everybody seemed excited.

Just as Sunil was beginning to enjoy the kudos, he was cut off. "Don't get too excited. Have you all thought of the kind of competition we'll be facing from global leaders in the US? We'll just be too insignificant even to take off," warned R Shanmugam, Nimax's fiery manager from the business co-ordination section. "And what about stable income lost from the contract manufacturing option? Aren't you guys aware that Prima's net loss totaled $24.8 million, up from $4.5 million last year? What if this alliance fails? There won't be any use crying over spilt milk," added Nimax's risk averse Finance Manager. Adding to these objections was the Human Resource head, Anupam Seth, "We'll have to sort out the cultural problems too. Don't overlook the fact that we would be dancing with strangers, which may not be a pleasant experience".
The managers seemed to be divided over the issue of forming an alliance, while the issue of whether Nimax should enter the world generic market and specifically the American one was once again on the backburner. The trio looked at each other in sheer dismay. It seemed as if they were back to square one. Conflicting views echoed within the plush interiors of Nimax's conference room. They were disrupted as one of the doors slammed shut. It was Shanmugam walking out of the meeting.