Group 5

Sagar Gupta 12P041 Radhika Bhatter 12P096 Rakshit Sharma 12P160 Soumyajit Sengupta 12P171 Varun Gopal 12P174 Aneesha Chandra 12P186

Cristina Morini Exchange

Strategic Alliances & Joint Ventures

Strategic Alliances & Joint Ventures

Pharmaceuticals v/s FMCG

Introduction Pharmaceutical Industry

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Key Trends

u  The market size of the global pharmaceutical industry stood at USD 962.1 billion in 2012

u  It is expected to grow at a CAGR of around 5% in the next 5 years

u  In 2018, it is expected to grow to a market size of USD 1,226 billion

u  Asia is expected to witness the highest growth rate between 11.4%-14.4%

u  Latin America, Africa and Australia are expected to closely follow at a CAGR between 10%-13%

u  The developed parts of the world are expected to show comparatively much lower growth rates:

u  USA: 0.7%-3.7%

u  Europe: (0.4)%-2.6%

u  Japan: 1.7%-4.7%

u  According to market size, North American market would remain the most important

u  A key success factor would be the ability to create new technology and innovative drugs

Aging population

Changing lifestyles

Hectic daily activities

Un-healthy eating activities

Increasing incidence of chronic diseases across the entire global population

Market Size by Geographies

North America

38%

Europe 24%

Asia 18%

Japan 12% ROW

8%

Key Industry Drivers

Key Risks

120

131 127 129

140

2007 2008 2009 2010 2011

R&D Spending (USD million) Strict Regulation

High Investment Requirement

Pricing Pressures and Shrinking Margins

Reputation Management

Developing innovative products (Patent Cliff)

Key Drivers for Strategic Alliances and Joint Ventures Pharmaceutical Industry

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Enter into Emerging Markets • Asia and Latin America are expected to grow at the highest rate

Sharing R&D Costs • R&D generally account for 15-20% of the revenues of a pharmaceutical company • Increasing customer demands for more specific and direct cures • Average cost per new drug is USD 300 million

Co-Developing New Products • Share the risks associated with NPD • Technology in return for Resources

Product Licensing and Co-Marketing • Marketing accounts for 25% of the revenues of a pharmaceutical industry

Economies of Scale • One of the main motives for cross-border alliances are for sharing production to increase capacity utilization and reduce investment

Benefitting from Partners Having an Established Strong Reputation • As having a strong reputation is essential in this industry, firms can benefit from tying with partners who have a strong reputation in a country/region

Cost Effective Sourcing • Drugs over $9 billion are expected to go off patent in 2015 • Firms are looking for outsourcing the drugs to players who can produce them at a low cost

Merck – Alnylam Non-Equity Strategic Alliance

u  Publicly listed on NYSE, $140.56b M.Cap

u  Founded in 1917 (USA nationalized the German subsidiary)

u  7 specific patient assistance programs

u  Among the top 7 Global Pharmaceutical Giants by Revenue & Market Cap

u  Revenue : $48billion

u  2012 Facility of the Year Winner for its Vaccine Facility

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u  Publicly listed on Nasdaq, $3.71b M.Cap

u  Founded in 2002 in Cambridge, Massachusetts

u  Core focus is development & commercialization of novel therapeutics based on RNAi

u  Created Regulus Therapeutics for development of microRNAi in collaboration with Isis

u  Revenue : $66.21million

u  Has entered into numerous strategic alliances with all the major players in the industry

u  Merck would provide Alnylam with a series of proprietary drug targets for validation purposes

u  Merck would inject cash in RNAi based drug development, giving it financial control over the research

u  Merck would help in commercialization of products Key

Driv

ers u  Alnylam would provide the technical know-how in RNAi based

therapeutics, which Merck lacked

u  Alnylam would test and develop RNAi based drugs for Merck to commercialize, helping it remain an innovation leader

u  Alnylam scientists would head the operational aspects

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u  Merck would make upfront & annual cash payments to Alnylam

u  Merck would also undertake equity investment if certain technological milestones were achieved by Alnylam

u  Merck would also make available all necessary requirements for RNAi based drug R&D to Alnylam, after evaluation

u  Merck would receive a co-exclusive license to Alnylam’s intellectual property

u  Any promising development could be further harnessed by Merck to create novel drugs

u  Alnylam would dictate the pace of R&D and handle the operations

GSK – Dong-A Equity Strategic Alliance

u  Publicly listed on LSE, GBP 75b M.Cap

u  Founded in 2000;Merger: Glaxo & Smithkline)

u  99 cities, 39 countries of operations, 70 countries of sales, 97,389 employees

u  4th Largest company by Revenues, 7th Largest by Market Cap.

u  Revenue : GBP 26billion

u  Follows a Tuck-in M&A policy acquiring companies to fill its portfolio gaps

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u  Publicly listed on KSE, Won 862m M.Cap

u  Founded in 1932, in Seoul, South Korea

u  32 cities, 2 countries of operations, 7 countries of sales, 2281 employees

u  Largest manufacturer of OTC drugs, ethical products, consumer brands & energy drinks

u  Revenue: $817million

u  Largest Subsidiary of Dong-A Socio Holdings.

u  Dong-A would lend its local marketing expertise in South Korea where it had become the industry leader with lesser products

u  Dong-A would also help increase GSK’s product penetration in South Korea through its efficient distribution network

u  GSK would be able to tap the “healthy” image created by Dong-A Key

Driv

ers u  GSK would impart its experience of managing other dynamic markets

to Dong-A to help it maintain its domestic leadership

u  Dong-A would be able to learn of the processes followed by GSK to help it become a global player in the industry

u  GSK’s proven product portfolio would help Dong-A enter new markets within South Korea

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u  GlaxoSmithKline would invest GBP 74million to acquire a minority stake of 9.9%

u  Initial activities included co-promotion of select GSK products & Dong-A products in South Korea for primary care

u  Co-sharing of profits at 50-50

u  A new separate team would be created within Dong-A to demarcate areas of cooperation and for proper management of the alliance

u  Alliance to be extended to other product segments if the initial agreement proved successful.

Hisun – Pfizer Joint Venture

u  Publicly listed on SSE, CNY 15.6b M.Cap

u  Founded in 1956, in Taizhou, China

u  30 countries, 9897 employees,

u  Largest Chinese pharmaceutical firm by revenues with subsidiaries in 7 countries

u  Revenue : RMB 450million

u  Winner of numerous efficiency awards & also voted as one of the most loved brands in China

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u  Publicly listed on NYSE, $190b M.Cap

u  Founded in 1849, in Connecticut, USA

u  34 factories, 5 countries of operations, 92 countries of sales, 91,500 employees

u  Among the Largest research-based pharmaceutical companies in the world

u  Revenue: $58.9billion

u  Major player in the M&A market with $68b acquisition of Wyeth being the biggest deal

u  Hisun would provide local production & distribution expertise for the joint venture

u  Local demand & environment based R&D would be imparted by Hisun

u  Pfizer would gain entry into the growing Chinese branded generics market and increase its global reach K

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u  Pfizer would lend its global marketing expertise for the penetration of the new products among the masses

u  Pfizer would impart managerial assistance in scaling up Hisun’s operations within China and also surrounding regions

u  Hisun would be able to achieve its strategic goals of becoming the Chinese pharmaceutical leader by a margin

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u  The management of the Joint Venture would be comprised of equal representation from Pfizer & Hisun

u  Primarily a manufacturing collaboration to tap the Chinese competitive advantage of production ability

u  Both parties to contribute an equal number of products to the Joint Venture for initial operations

u  Both parties to make available any resources, both financial and physical, for the successful operation of the Joint Venture

u  Pfizer would support the Chinese pharmaceutical industry by lending global feedbacks with respect to changing market dynamics

u  Profits from the sale of products released by the JV would be shared equally after management set aside funds for reinvestment

Intrexon – Sun Pharmaceuticals Joint Venture

u  Publicly listed on BSE, INR 129,582Cr. M.Cap

u  Founded in 1983, in Kolkata, India

u  23 countries of operations & sales, 11,200 employees

u  3rd Largest Indian Pharmaceuticals company by Revenue and the Largest by Profits & M.Cap

u  Revenue : INR 8005 Cr.

u  Active in the M&A segment with inorganic growth being a primary driver for the last 20 years

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u  Publicly listed on NYSE, $2.1b M.Cap

u  Founded in 1998, in Virginia, USA

u  Pre-dominantly present in USA as a Synthetic-biology player

u  1st of its kind company to combine engineering & design aspects to create gene-systems

u  Has collaborations with almost every advanced R&D lab in USA dealing with synthetic biology

u  Recently successful in launching IPO

u  Sun Pharma would lend its past experience in developing and manufacturing complex dosage forms

u  Sun Pharma would impart its marketing & production capabilities in specialty pharmaceuticals in niche areas

u  Intrexon would gain easy access to an emerging market like India Key

Driv

ers

u  Intrexon would lend its biotechnology capabilities to the JV for development of methods to deal with ocular diseases

u  Sun Pharma would be able to leverage cutting edge technology to become an innovation leader in a virgin field in India

u  Intrexon would also allow JV to use its RTS platform helping Sun gain knowledge of such technology

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u  Joint development of controllable gene-based therapies to tackle eye diseases causing partial/total blindness

u  Financing requirements would be fulfilled by equal contribution by both Sun Pharma & Intrexon Corporation

u  Equal Profit sharing mechanism from JV’s profits

u  JV would have access to Intrexon’s full product portfolio

u  Sun Pharma would be the sole channel collaborator for Intrexon in India

u  JV could be extended to other forms of ocular disease treament if the initial arrangement succeeded.

Introduction FMCG Industry

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Key Industries

Dramatic population growth (A billion new customers)

Income gains in emerging economies (growing middle class and improving purchasing power of rural class)

Rapid urbanization

Changing lifestyles

Shifting demographics – Aging Population

Rise of Digital Consumers (Both e- and m-commerce)

Health and Wellness Concerns

Premiumization

Flexible Fulfilment of Orders (due to hectic schedules of customers)

Greater use of Bid Data Analytics

Increase in Environmental and Social Responsibility

Key Industry Drivers

Food and Beverages

35%

Personal Care 28%

Hair Care 12%

Personal Healthcare

8%

Household Products

7%

Laundry 5%

Personal Accessories

3%

Others 2%

Key Risks

u  Emerging markets are expected to drive the growth for the FMCG sector

u  Asia is expected to overtake the West as the main consumer market

u  In India, the FMCG sector is expected to grow at a CAGR of 14.7%

u  The industry is characterized by low margins and is thus, voume-driven

Rise of the Value Segment will Affect Margins

• Private label players account for 40% of supermarket sales in UK, 30% in Germany,15% in USA

• Austerity measures in developed countries

Volatile raw material prices

• Due to Emergence of Global Supply Chains • Natural Resources Shortages

Price Deflation

Deteriorated Consumer Environment in Developed Nations

Increasing competition

Speed and Success of Innovations

Brand and Marketing Effectiveness

• Particularly while entering into new markets, companies will have to balance the target customer group and the requisite investment

Regulation and Quality Control Norms

Key Drivers for Strategic Alliances and Joint Ventures FMCG Industry

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Enter into Emerging Markets • Asia is expected to overtake the developed countries in terms of market size • 1 billion more consumers in Asia and Africa in the next decade

Sharing Distribution Costs • By entering into a strategic alliance, companies will be able to leverage the already established distribution network of other companies

Entering into New Products • Instead of developing products from scratch, firms can form alliances to enter into new product segments

Economies of Scale • Setting up of manufacturing facilities involves large capital expenditure • Alliances allows the firms to improve capacity utilization of existing plants and saves cost of constructing new plants

Benefitting from Partners Having an Established Strong Brands • Strong existing brands and reputation makes the entry into new markets easier for players

Streamlining Value Chain • Strategic alliances may allow firms to source raw materials more efficiently

Sharing R&D costs • The emerging value-conscious customers are looking for higher value and lower prices • They also demand products which meet specific requirements • Sharing R&D, allows firms to meet these demands without large outlays

Technology Transfers

Tata Coffee – Starbucks Starbucks Coffee, A Tata Alliance (Joint Venture)

u  Publicly listed on BSE, INR 2062Cr M.Cap

u  Founded in 1922

u  19 coffee estates in South India

u  Largest integrated coffee plantation company in the world

u  Revenue : $64million (FY 2011)

u  Profit: $8.4million (FY 2011)

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u  Publicly listed on NYSE, $57.75b M.Cap

u  Founded in 1971

u  20,891 stores in 62 countries

u  Largest Coffee-house company in the world

u  Revenue : $13.29billion (FY 2011)

u  Profit: $1.38billion (FY 2011)

u  Tata Coffee would get a captive customer in the form of Starbucks for its operations in India

u  Indian-grown Arabica’s brand position would improve globally

u  Business Values fit as the Starbucks brand was known for Quality & a Rich Customer Experience K

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u  Starbucks would earn greater public confidence through Tata

u  Business Values fit as Tata Group had a proven track record of Unparalleled Ethics and Customer Value in India

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u  Opening a Roasting & Packaging Facility in Karnataka

u  Local Development of the signature Starbucks Espresso Roast

u  Product Offerings customized to Indian sensibilities

u  50 stores across the country by end of 2013

u  Store operated by Tata Global Beverages

u  Outlets positioned in Premium areas to preserve positioning

u  A tea brand to be developed under the Tata Tazo brand

Nestle – General Mills Cereal Partners Worldwide (Joint Venture)

u  Publicly listed on SIX:NESN, $233b M.Cap

u  Founded in 1905, in Vevey, Switzerland

u  450 factories, 86 countries, 328,000 employees

u  Largest food company in the World by Revenues

u  Revenue : CHF 92billion

u  Ranked Most Profitable in Fortune Global 500 in 2011

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u  Publicly listed on NYSE, $30.55b M.Cap

u  Founded in 1866, in Minnesota, USA

u  66 factories, 11 countries, 35,000 employees

u  Largest food company in the USA by Revenues

u  Revenue: $14billion

u  Ranked 124th in Fortune Global 500

u  General Mills would lend its immaculate production efficiency & product innovation to create new offerings

u  General Mills would lend it cereal marketing expertise

u  General Mills had a broad portfolio of successful brands

Key

Driv

ers u  Nestle would impart the requisite marketing efforts & distribution

channels to increase the sales of cereals

u  Nestle would streamline the value chain across the world

u  Nestle would help in achieving greater scale economies

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u  Created in 1991 to sell breakfast cereals created by General Mills in 130 countries, except USA & Canada under the Nestle brand

u  Allows for production of private label cereals in UK

u  Independent development of new cereal brands

u  Partner acquisition prohibited as per JV Agreement

u  General Mills’ cereal specific production facilities outside USA would be transferred to CPW

u  CPW would be independently managed by a neutral board, with freedom to operate as a separate legal entity

Gorenje – Panasonic Equity Strategic Alliance

u  Publicly listed on GRVG, $109m M.Cap

u  Founded in 1950, in Velenje, Slovenia

u  83 companies, 70 countries, 10,785 employees, Continental M.Share=4%

u  Largest Electronics company in Slovenia, 8th largest electronics manufacturer in Europe

u  Revenue : Euro 1.26billion

u  Winner of numerous innovation awards in appliances manufacturing over the years

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u  Publicly listed on TSE, Yen 2283b M.Cap

u  Founded in 1918, in Osaka, Japan

u  580 companies, 113 countries, 330,000 employees

u  Among the Big 4 Japanese electronics makers, 4th highest market share in TV in 2012

u  Revenue: $75.8billion

u  Major player in the M&A market with nearly 25 deals in the last 4 years

u  Panasonic will help in attaining higher absorption of fixed costs by leveraging on increased production utilization

u  Panasonic would help lend technical know-how towards development of new products

u  Help increase Gorenje’s stature in Europe even more Key

Driv

ers u  Access to Gorenje’s efficient manufacturing capabilities

u  Gorenje would lend its European marketing expertise & widespread distribution channels

u  Gorenje’s innovations could be developed further to create even better products

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u  Panasonic would acquire a minority stake of 13% in Gorenje for $12million

u  Standstill agreement to be in place

u  Joint development of new products, especially portable electronics

u  Exchange of specific knowledge of market requirements, technical solutions & development techniques

u  Panasonic brand to be used by Gorenje in Europe

u  Gorenje brand to be used in Asia by Panasonic in markets where Gorenje is not present but Panasonic is.

Reckitt Benckiser – Hoovers’ Company Non-Equity Strategic Alliance

u  Publicly listed on LSE, GBP 30.68b M.Cap

u  Founded in 1999, in Berkshire, UK

u  60 countries of operation, 200 countries of sales, 35,900 employees

u  Largest British Consumer Goods company

u  Revenue : GBP 9.57billion

u  Category leader in most domains of operations, with Dettol being the most iconic

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u  Privately Held

u  Founded in 1908, in Ohio, USA

u  Worldwide presence, except Europe where sister concern is owned by Candy Group

u  Fallen Giant in the field of home appliances & equipment

u  4th highest selling white goods player in USA

u  Critically acclaimed equipment design with the highest no. of patents in floor-care

u  Hoover’s strong brand name in the floor-care segment

u  Hoover would lend unmatched product innovation capability & manufacturing capacity

u  Hoover’s patent portfolio would help create a new market

Key

Driv

ers u  RB brought the strongest player in the household cleaning

consumable market

u  RB lent its consumer chemical manufacturing expertise

u  RB would lend its infrastructure & distribution networks

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u  Joint development of products to create a revolutionary new product segment

u  Hoover equipment & RB household cleaning products would be in the operating scope of the alliance

u  Incremental investment in distribution networks

u  Hoover’s patent portfolio to be made available to RB for product development, with royalty tied to it

u  Cross-sell products in each other’s distribution networks with Hoover’s products being made available to retail consumers

u  If successful, alliance could be extended in scope & size

Similarities Differences

Key Drivers Similarities and Differences

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u  Entry into emerging markets and products (extremely important for both sectors)

u  Sharing of R&D costs

u  Sharing of Marketing costs

u  Leveraging Established Distribution Channel of Partner

u  Leveraging the Strong Reputation and Brands of Partner

u  Achieving economies of scale in production

u  Order of Importance is highly different

u  In case of pharmaceutical sector, the main drivers are

u  Sharing of R&D and marketing costs

u  Co-development and production of products

u  In case of FMCG sector, main drivers are:

u  Sharing of distribution networks

u  Leveraging strong brand name of partner

Shift in Balance of Power Similarities and Differences

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Pharmaceutical Industry FMCG Industry

Initial Alliance

Sustainable Power

Balance

Towards Global Partner

Power Collision

Towards Local

Partner

u  Merck-Alnylam u  Collaboration was terminated in 2007 due

to power collision

u  Merck got IP rights of all co-development programs

u  GSK-Dong-A u  Collaboration still exists

u  However, power balance is more towards GSK (global partner) as Dong-A has had to give up some products so as to market GSK’s product line

u  Hisun-Pfizer u  Collaboration still exists

u  Sustainable Power Balance

u  Intrexon-Sun Pharmaceuticals u  JV announced on 1 October 2013

u  TATA Coffee-Starbucks u  JV came in operation in 2012

u  Nestle-General Mills u  JV was established in 1991 and has

delivered strong returns for both the companies

u  Sustainable Power Balance

u  Gorenje-Panasonic u  Panasonic is the minority stakeholder in

Gorenje

u  However, Gorenje has no stake in Panasonic, thus putting it on a weaker end

u  Reckitt Benckiser – Hoover’s Company u  Strong alliance since 2001

u  Sustainable Power Balance

Possible Power Balances for Alliances

u  Overall, pharmaceutical industry has a higher alliance failure rate of 50%. Power collisions are common and generally results in lengthy court battles over IP disputes

u  In case of FMCG sector, shift towards global partner or sustainable power balance are more frequent

Strategic Alliance Orientation Similarities and Differences

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Control Flexibility

Security Productivity

Primary Risk Relational Risk Performance Risk

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Ø  In case of pharmaceutical company, the primary resource is knowledge as it generally involves co-development of products

Ø  The primary risk is relational risk as cultural clashes and power collision often lead to failure of the venture

Ø  In such a scenario, the strategic alliance should have a security orientation to address the concerns about security of contributed resources

Ø  They can be done by ensuring that the operations of alliance are carried out separately example Through a funded R&D

Ø  In case of FMCG company, the primary resource is property as economies of scale in production are often a common motive

Ø  The primary risk is performance risk as the new products may not work, or macroeconomic environment may worsen etc.

Ø  Alliance should have a flexibility orientation to address the concerns about the alliance failing

Ø  They can be done by having an incremental process of alliance making

Value Derived from the Strategic Alliance Similarities and Differences

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ROI Discounted

ROI Dynamic

ROI

Market Share

Cost Savings

Growth Opportunities

IP Rights Capability Development

New Strategic Options

Brand Loyalty

Component Performance

Short Run Long Run

Cash

Supply

Positioning

Business Development

Learning

Most Important Value Creators in an

Alliance in the Pharmaceutical

Sector

Most Important Value Creators in an

Alliance in the FMCG Sector

Maturity Phase Growth Phase

Industry Life Cycle and Partner Selection Similarities

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u  Both industries are facing a mature market in the developed countries

u  The growth rates are low and the big players are already well-established

u  Low degree of uncertainty in these markets

u  Hence, the strategic alliances in these mature developed markets are

u  To optimize the cost structure with the help of process innovations

u  Licensing and co-marketing products to reduce costs and gain market share

u  Select partners which are strong in terms of resources and capabilities

u  Both industries are facing a growing market in the emerging countries

u  The penetration is low and the potential is huge

u  High degree of uncertainty and risk

u  Hence, the strategic alliances in these growing emerging markets are

u  To find well-established partners to gain local knowledge, leverage distribution system and to reduce uncertainty

u  To select partners which have promising ideas/prototypes of new technology and products

u  To develop new products according to the requirements of these regions