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Valeant Pharmaceuticals Case Solution
The report aims at exploring the competitive and strategic dynamics of Valeant, a pharmaceutical company located in the United States of America. The company merged with a Canadian pharmaceutical company named Biovail in the year 2009/10. The merger was done in pursuit of creating synergies and exploiting opportunities at both ends. However, such a drastic change in strategy and structure has its own pros and cons. The report analyzed the internal environment of the newly merged company using the RCC model and then analyses its external environment using PEST analysis and Porter’s Five Forces model. The third section of the report analyses the financial statements of the company in order to explore the internal conditions of the company. The fourth section covers the competitive rivalry model and explores the dynamics of rivalry among four major rivals in the industry. Lastly, strategic recommendations are made to enhance strengths, reduce weaknesses, prevent and avoid threats, and take advantage of opportunities.
Following questions are answered in this case study solution
Political –Economic Environment
Comparative Rivalry & Analysis
Case Analysis for Valeant Pharmaceuticals
2. Internal Audit
The company has both, intangible and tangible resources. Tangible resources include financial, organizational, physical, and technological resources. The company has a strong financial background as the sales revenue increased to the bracket of 2.1 million-2.3 million dollars. The company offers a wide range of products around the globe, and the sales revenue figures clearly indicate that the company has a strong infrastructure, which it is exploiting. The physical resources owned by the company are also self-sufficient as the company has merged with one of the largest companies in Canada. After that, the company has been acquiring smaller companies like PharmSwiss. The company has voluntarily reduced its technological resources by cutting down research and development costs by half. It has shifted its focus to other tangible resources. Intangible resources include human, innovation, and reputational resources. It has managed its human resources by cutting out 1100 personnel from the newly merged company; thus, reducing the numbers, but increasing efficiency. Innovation resources mainly come from research and development, on which the company has reduced its dependency. The company offers branded products and has been advertising via proper channels in order to maintain its reputation and brand image.
The company mainly distributes via pharmacies as it is one of its main customers and all of its customers make OTC transactions at the pharmacist. The company’s human resources are spread around the globe, and the company reduced its human resources in order to reduce the cost of redundant personnel. It does not have its own management information system, but the company uses technological distribution channels to target its four main types of customers. The company faces stringent and rigid regulations from DDMAC, which reduces its marketing capabilities, but the company still pursues an aggressive advertising strategy by educating its customers via peer-review journals and et cetera. The senior and executive managers are mostly from GSK or McKinsey & Company, which gives them rich experiences to run the company. Lastly, the research and development capabilities of the company have been voluntarily reduced as the company has been acquiring successful drug companies.
The company’s strong financial backbone, which supports rapid acquisition strategy, acts as the company’s valuable competency as its ward offs threat of strong competition. The company’s executive management acts as a rare competency as it has experienced members from the Canadian and American regions. The management possesses diversified experience form large giants like GSK and McKinsey. The company has been investing in specialty products, which are rare in the market e.g. Mestinon. This acts as the company’s competency that many competitors would have to invest a large amount of money. Lastly, the company has made alliances with large companies like GSK and laid an infrastructure, which developed strong relations in the distribution network like PMBs.
3. External Audit
The US Pharmaceutical industry consists of about 1,500 companies. 80% of the industry revenue is earned by the top 50 companies. Vaeant has few competitors. Its direct competitors are in the neurology, namely Teva Pharmaceutical Industries Ltd., UCB S.A., and H. Lundbeck.
Barriers to Entry
Barriers to entry in the Pharmaceutical industry are very high as it is a highly regularized industry requiring numerous certifications and approvals such as those from the FDA. New entrants find the process long and quality standards expensive and difficult to achieve. Also, due to the trend of mergers and acquisitions, smaller firms are often taken over by large giants in the industry.
Availability of Substitutes
DiastatAcudial by Valeant is the only FDA approved drug that can be used at home for “acute seizure control”, therefore, it does not have many substitutes. However, Azilect, which is a product provided through collaboration between Teva and H. Lundbeck is a direct competitor of competes Zelapar, which is Valeant’s drug for the treatment of Parkinson’s. UCB also provides some substitutes related to epilepsy and the central nervous system that may be considered as substitutes.
Bargaining power of buyers
The bargaining power of buyers is high for the pharmaceutical industry. Buyers are categorized into physicians’ pharmacy benefit managers (PBMs), patients, and pharmacies. Physicians consider numerous factors such as marketing efforts, cost, insurance coverage etc when choosing a company.
The highest power is with the PBMs who decide which drugs to place on a formulary, a tier status for the drugs, limitations, and copays. They also advise physicians and patients according to their own judgments. Pharmaceutical companies often offer deals to PBMs in order to get higher status as it means higher prescriptions by physicians and lower costs for patients. Patients also have high power as they have increased information due to the availability of media, internet and physician recommendations. Pharmacies also impact a patient’s buying decisions.
Bargaining Power of Suppliers
The bargaining power of suppliers is high as companies like Valeant are highly dependent on them for outsourcing. It is not easy to find suppliers who can comply with the regulations and standards of the FDA and it is also essential to maintain quality and ethics at all stages of production and selling of drugs.
4. Political –Economic Environment
The Pharmaceutical industry operates in a hostile environment as regulations by the FDA are very strict and also expensive to comply to. There are numerous barriers that must be overcome in order for a drug to enter the market. Also, R&D costs are much higher than the generated revenues. Furthermore, strict visa requirements of the US also create hurdles for acquiring R&D from companies abroad. Pharmaceutical companies are not only bound to comply with quality and ethical standards, but their marketing efforts are also scrutinized.
The global financial crises of 2008 caused difficulties for several companies. This recession also had a serious impact on American pharmaceutical companies. The merger of Valenat and Bioviral may have been an attempt to deal with economic difficulties.
Due to improving health facilities, life expectancy of the US population is rising and it is expected that the number of people aged 65 and above will double within the next twenty-five years. However, neurological disorders are on the rise and are expected to further increase exponentially as the population ages. More than one million Americans suffer from Parkinson’s disease while about three million have epilepsy. A more common problem of Migraine is faced by 28million Americans. Another serious yet uncommon condition is Myasthenia gravis, which affects 13,600Americans.
Advances in technology aid pharmaceutical companies in introducing new products with speed and efficiency. Companies are now using electronic collaboration software such as the EMC Documentum enterprise compliance platform. Such software help reduce costs while provide faster service and access to information. Constant revision of information often makes it difficult for pharmaceutical companies to catch up.
By the end of the year 2010, the merger had completed, and the new company was ready to exploit the synergies created by the merger. The company had reported a gross profit margin of 72%. This clearly shows that the company’s cost had significantly gone down. However, expenses related to the company’s administration and sales were significantly high because the gross profit margin of 73% turned into -11.46% when it trickled down to the bottom line. Due to significant losses, the company’s other profitability indicators were also down i.e. ROA of-1.6% and ROE of -3.1%. Clearly, the company was something wrong in its operations as the gross profit margin of 73% was translated into the -11% net profit margin. Ratios regarding operation reveal that the company’s collection of accounts receivable is slow as it takes approximately 4 months (117 days) for recovering its accounts receivables. Moreover, this ratio was further explained by the net receivables turnover flow ratio of 3.1, which means that the company is able to collect its accounts receivable in totality only 3 times in one year. The industry ratio of 2.5 shows that the other companies are able to sell and restock their inventories 2.5 times in one year. Asset turnover ratio 0.1 shows that the company is not utilizing its assets base to generate sales i.e. for every one dollar of assets; the company is generating 0.1 dollars. The quick ratio, a refined version of the quick ratio, revealed that the company does not have enough liquid assets to cover its short-term debt. It can be asserted that the company is stuck in a working-capital lock as it does not have enough assets to cover its short-term debt, which is hindering the company’s operations.
6. Business-Level Strategies
Teva Pharmaceutical Industries Limited pursues a cost leadership strategy as its main focus in on generic medicines. The company’s gross profit margin of 56% and the net profit margin of 19% clearly shows that the company has been focusing on low-cost products. The company tries to find out loopholes in patents of other companies’ products and then tries to sell products at cheaper prices than competitors. However, copying medicine might not result in high-quality products but still performs basic functions. The company is number one in terms of sales revenue and market capitalization.
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