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    Executive Summary: A. The North American Dermatology Division's 2017 EVA

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    Atul Anand bj21135
    Vyaderm Pharmaceuticals is an American pharmaceutical company that manufactures both generic and branded drugs. It has 15 subsidiaries worldwide and focuses on dermatology, gastroenterology, and veterinary drugs. The company's profits had been slipping despite meeting market expectations. The new CEO wanted to implement an Economic Value Added (EVA) system to incentivize long-term growth over short-term earnings targets. The summary calculates EVA and estimated bonuses for a manager in 2017 and 2018 to evaluate EVA as the sole performance metric.

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    Executive Summary: A. The North American Dermatology Division's 2017 EVA

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    Atul Anand bj21135
    119 views2 pages
    Vyaderm Pharmaceuticals is an American pharmaceutical company that manufactures both generic and branded drugs. It has 15 subsidiaries worldwide and focuses on dermatology, gastroenterology, and veterinary drugs. The company's profits had been slipping despite meeting market expectations. The new CEO wanted to implement an Economic Value Added (EVA) system to incentivize long-term growth over short-term earnings targets. The summary calculates EVA and estimated bonuses for a manager in 2017 and 2018 to evaluate EVA as the sole performance metric.

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    Vyaderm Pharmaceuticals is an American pharmaceutical company that manufactures both generic and branded drugs. It has 15 subsidiaries worldwide and focuses on dermatology, gastroenterology, and veterinary drugs. The company's profits had been slipping despite meeting market expectations. The new CEO wanted to implement an Economic Value Added (EVA) system to incentivize long-term growth over short-term earnings targets. The summary calculates EVA and estimated bonuses for a manager in 2017 and 2018 to evaluate EVA as the sole performance metric.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    119 views2 pages

    Executive Summary: A. The North American Dermatology Division's 2017 EVA

    Uploaded by

    Atul Anand bj21135
    Vyaderm Pharmaceuticals is an American pharmaceutical company that manufactures both generic and branded drugs. It has 15 subsidiaries worldwide and focuses on dermatology, gastroenterology, and veterinary drugs. The company's profits had been slipping despite meeting market expectations. The new CEO wanted to implement an Economic Value Added (EVA) system to incentivize long-term growth over short-term earnings targets. The summary calculates EVA and estimated bonuses for a manager in 2017 and 2018 to evaluate EVA as the sole performance metric.

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    Executive Summary

    Vyaderm Pharmaceuticals is an American Pharmaceutical manufacturing organisation which


    started manufacturing common drugs like Penicillin. Later on, they also evolved into patent-
    protected as well as brand-protected products. Currently, Vyaderm Pharmaceuticals majorly
    work in area related to dermatology, gastroenterology, and veterinary drugs. And have 15
    subsidiaries worldwide. The top executives of the company feel that the executives are working
    just for improving the ‘Earnings per Share’ data and this doesn’t allow the synergy between
    the division and subsidiary for the overall growth of company.
    Along with this even though the company was able to meet the market analyst predictions, the
    profit of the company was slipping. CEO Maurice Vedrine felt that it is happening because due
    to previous CEO the manager were focused only on improving the ‘Earnings per Share’ and
    wanted to implement the EVA system as he believed that this would make manager focus more
    on the long term growth of the company.
    We have calculated the EVA and Bonus Payment of a manager for the year 2017 and estimated
    the same for 2018 under historic growth assumptions to understand the implication of
    implementing EVA as the sole metric for performance bonus payment
    We observe the EVA provides a more comprehensive and transparent method of bonus
    calculation but it can drastically change for varying income growth rate.

    Problem Statement
    To calculate the bonus of a manager using the EVA method for the year 2017 and estimated
    for the year 2018 and assess whether the proposed method of EVA should be implemented
    throughout the organisation

    Different cases for evaluation


    A. We’ll calculate the 2017 EVA for the North American Dermatology Division

    B. To see the implications on bonus, we’ll calculate the 2017 EVA bonus pay-out for a
    manager earning $300,000, for a bonus which is based 100% on division’s EVA

    C. We’ll estimate the bonus pay-out for the same manager, considering profits falling back to
    the same level as before and the EVA improvement goal remaining constant. This will help
    us get an idea about the method’s practicality in cases where profits fall.

    Calculations

    A. The North American Dermatology Division’s 2017 EVA

    For calculating EVA certain adjustments are to be made in the R&D, consumer advertisement
    and goodwill account.

    R&D Capitalised and Amortised on a straight line basis over 5 years:


    R&D( Capitalised 2012 2013 2014 2015 2016 2017 2018
    and Amortised (estimate)
    for 5 years in
    SLM)
    R&D expense for
    the year $ 10,673 $12,487 $14,610 $ 17,094 $20,000 $ 39,000 $ 26,824
    2012 $ 2,135 $ 2,135 $ 2,135 $ 2,135 $ 2,135
    2013 $ 2,497 $ 2,497 $ 2,497 $ 2,497 $ 2,497
    2014 $ 2,922 $ 2,922 $ 2,922 $ 2,922 $ 2,922
    2015 $ 3,419 $ 3,419 $ 3,419 $ 3,419
    2016 $ 4,000 $ 4,000 $ 4,000
    2017 $ 7,800 $ 7,800
    2018(estimate) $ 5,365
    Cumulative R&D $ 10,673 $23,160 $37,770 $ 54,864 $74,864 $1,13,864 $ 1,40,688
    Cumulative
    Amortization of
    R&D $ 2,135 $ 6,767 $14,321 $ 25,293 $40,266 $ 60,904 $ 84,410
    Capitalised R&D $16,393 $23,449 $ 29,571 $34,598 $ 52,960 $ 56,278

    The 2018 estimate has been done here taking the 2018 R&D expense/Income ratio as an
    percentage average of R&D expense/Income for the years 2014-16.

    Consumer advertising capitalised and amortised over 3 years on a straight line basis:

    Advertising(Capitalised and 2013 2014 2015 2016 2017 2018


    Amortised over 3year in SLM) (estimate)
    Advertisement Expense per
    year $ 34.00 $ 38.00 $ 41.00 $ 45.00 $ 50.00 $ 68.37
    2013 $ 11.33 $ 11.33 $ 11.33
    2014 $ 12.67 $ 12.67 $ 12.67
    2015 $ 13.67 $ 13.67 $ 13.67
    2016 $ 15.00 $ 15.00 $ 15.00
    2017 $ 16.67 $ 22.79
    2018(estimate) $ 22.79
    Cumulative Advertising
    Expense $ 34.00 $ 72.00 $113.00 $ 158.00 $208.00 $ 276.37
    Cumulative Advertising
    Amortisation $ 11.33 $ 35.33 $ 73.00 $ 114.33 $159.67 $ 220.25

    Capitalised Advertise $ 22.67 $ 36.67 $ 40.00 $ 43.67 $ 48.33 $ 56.12

    The 2018 estimate has been done here taking the 2018 Advertising expense/Income ratio as
    an percentage average of Advertising expense/Income for the years 2013-16.

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