Business Memo

To: Pearson, J. Michael, Chairman and Chief Executive Officer

From: Linli Qu, Research Analyst

Date: October 22, 2015

Subject: Proposal to increase revenue without severe price hike

The newly top drug products from Valeant’s recent acquired company raised our revenue this year while the sudden price hike of two drugs also caused concerns of sustainability. I propose a project to develop more revenue earners through R&D strategies other than depend on surging products’ price at an expense of our customers.  

Controversial Price Surge

After acquiring the drugs assets of Marathon, we increased prices of two main heart drugs, Isuprel and Nitropress, by 525% and 212%, respectively. It exceeded US healthcare industry standard of 6-8%. Wall Street believed that beating the earning estimation and boosting stock price were the only incentives for this controversial tactic. Beyond that, our patients keep complaining about the price surge on our drug products.

Possible Impacts on Our Business    

Potential Loss of Market Share and Goodwill: Although we believe that the increasing value of our company does not rely on price hike and we do have strong organic growth, the arguments of Wall Street are likely to impose a psychological irrationality on our institutional and individual investors. Our market share will get hurt. If the unreasonable price increase continues, our customers tend to switch to competitors.

Potential Issue of Business Model: Our traditional expansion strategy involves acquiring mature drug companies and marketing their high-profit drug products to avoid the high risk of R&D failure in pharmacy industry. The recent yearly R&D spending is less than 2% of our revenue. Even though the rising price of new products compensates the declining return on R&D, we probably cannot expect a sustainable trend for this price strategy, which indicates the potential problem with our business model.

Estimation of Project Resources and Timeline

To research the problem and set forth a strategy, I developed the following process.  

1. Collecting the historical data: I will use the historical data of our company to analyze past performance and compare with the industry to evaluate our current pricing strategy.  

Resources: Historical revenue drivers, trends of product price, R&D costs and returns etc. from annual reports and company database.

1. Analyzing acquired companies: By testing R&D departments of successful acquired companies, we can learn effective R&D process and structure to improve our own model.

Resources: R&D facilities, structures, models and talent teams from acquired companies.

1. Gathering Customers’ Feedback: I will interview crucial institutional customers, do online surveys for individual customers and collect posts on social networking platforms.

Resources: Facilities of customer service center, Information Technology System  

Total time commitment of labor: Customer service center and IT department - 10 hours, Finance and Data Management department - 20 hours, R&D department - 20 hours.