Vyaderm Pharmaceuticals:

The EVA Division

Group 6
E007 Ram Akula
H027 Khitindra Dalai
H012 Rahul Deshpande
H044 Tushar Jha
B058 Ankit Singhania
Vyaderm Pharmaceuticals Company History

Founded in 1945 and became a large competitor within the industry in the
post-war healthcare world
Thomas E. Finn, former CEO, led the company to financial success with a
business strategy focused strictly on earnings per share (by 2013 Vyaderm
had a market cap of $2.7BN)
Problem with approach: There was little sharing of best practice or interest
in helping build synergies across the companys 15 subsidiaries to support
corporate strategy
Economic Value Added Approach

In 2014, new CEO Maurice Vedrine, decided to move away from the old
earnings per share business strategy and implement an Economic Value
Added Approach to:
1. To demonstrate to the investment community the intent to continue
Vyaderms profitable growth
2. To provide a solution to conflicting management priorities caused by
competing financial measures
EVA CALCULATIONS AND
ADJUSTMENTS
Reincarnation of Residual Income concept developed by GM in 1920s and
practiced by companies like GE
Measures the extent to which a companys after-tax operating profits covered
the shareholders cost of capital
EVA = Net Operating Profit After Taxes [Capital * Cost of Capital]
Upto 160 accounting adjustments are possible, with EVA companies typically
using less than 7 adjustments, for ease of calculation and to maximize
understanding and acceptance of EVA by managers
Vyaderm adjusted only 4 accounts:
Research and Development
Consumer Advertising
Goodwill
Restructuring Charges
Vyaderm EVA Incentive Program

Old compensation system: New compensation system: EVA

program
1,000 managers received annual
bonus 3 components
Half of bonus based on objective EVA Centers
operating results (business unit sales,
earnings, and asset mgmt.) EVA Target
EVA Interval
Half based on a subjective
evaluation of managers EVA Drivers
contribution
EVA Performance Level
Problem: there was no explanation
on how bonus amounts were
calculated.
Managers focused on their interest
(increasing their bonus) rather than
shareholders interest (profit)
The Dermatology Opportunity

January 2017
Main competitor, PJL Laboratories, was required by the FDA to recall all
antifungal cream based on quality purposes.
This caused a temporary price increase and substantially boosted the
dermatology businesss profit margin.
Profits greatly exceeded their EVA target.
January 2018
Another competitor entered the antifungal cream market and Vyaderms
prices fell back to historical levels.
Problem: One-time, outside anomaly affected the Dermatology businesss
numbers. This would cause a large bonus payout this year, but could
potentially wipe out next years bonus payout if the business underperforms
Questions

2017 EVA for the North American Dermatology division

2017 EVA bonus payout for a manager earning $300,000, assuming that the
managers bonus was based 100% on the divisions EVA
2018 and 2019 EVA and estimated bonus payout for the same manager,
assuming that Vyaderm profits fell back to historical levels and the year-to-
year EVA improvement goal remained constant