business plan value drugs

BUSINESS PLAN

FOR

VALUE DRUGS

by: JAMES SMITH

111 EXISTING ROAD

WESTSIDE, 90000 NEW YORK

(212) 999-0808

Presented to:

JANE DOE C/O MANUFACTURING NATIONAL BANK

00/00/19xx

Copy ____ of ____ copies distributed

This business plan contains information that is not to be shared, copied, disclosed or

otherwise compromised without the consent of VALUE DRUGS.

Value Drugs Business Plan

Table of Contents

Table of Contents

Executive Summary

Introduction 4

Mission Statement 4

Unique Features 5

Marketing Objectives 5

Expected Accomplishments 6

Required Capital 6

The Business

Purpose Statement 7

Description of the Business 8

History of the Business 8

Founder of the Business 9

Management and Operations 9

Regulations and Licensing 10

Objectives 10

Market Analysis

Market Research 12

Target Market 14

Competition 16

Customer Profile 17

The Product

Production 19

Product Decisions 20

Inventory 20


Table of Contents

Marketing

Objectives and Strategies 22

Unique Selling Advantage 22

Selling Tactics 23

Channels of Distribution 25

Pricing 25

Promotions

Advertising 27

Sales Promotions 29

Publicity and Public Relations 29

Risks

Description of Risks 31

Contingency Plans 32

Finances

Sources and Uses of Capital 33

Balance Sheet 34

Cash Flow Statement 35

Income Statement 37

Break Even Analysis 39

Ratio Analysis 40

Cost Containment 42

Assumptions 43

Conclusion

Justification for Loan/Investment 44

Milestones/Timetable 44


Executive Summary 4

Executive Summary

Introduction

The purpose of this business plan is to provide the reader with a comprehensive synopsis of Value Drugs

(the company) and its plans of expansion. Value Drugs was established in 19xx in response the consumer

demand for discount pharmaceutical products. The company manufactures and distributes a stomach-relief

medication which is marketed as a high-quality, but discount, alternative to the existing range of stomach-

relief pharmaceutical products on the market. Since its founding, the business has proven to have met the

market need and has generated an impressive supplementary income for the owner, Joe Formulary, a full-

time college chemistry professor. Given the company’s record of success the owner now intends to devote

all of his attention to Value Drugs by managing the business full-time and expanding its reach by enhancing

existing production capacity, adding an additional product line for cough syrup, and expanding the

company’s sales efforts.

Mission Statement

The mission of Value Drugs is to provide consumers with, and to be the preferred brand for, high-quality

pharmaceutical products at a reasonable price.

Because of its small scale of operation and narrow focus, Value Drugs has been, and will continue to be,

able to provide pharmaceutical products of equal or better quality than the major brands. Value Drugs will

continue to market a discount stomach-relief medication and plans to add a discount cough syrup product to

its product mix. These products will contain the same ingredients as the major pharmaceutical products and

will have the same medicinal effects, yet will retail for about half the price of existing brands.

Value Drugs intends to increase its production capacity and expand its sales effort to include local discount

retail chains, supermarkets, drug stores, and gift shops in the Massive City area. Eventually, the company

will broaden its scope to include regional, then national distribution.

Its typical customers are those quality conscious, yet frugal, consumers, many of whom are from lower-

income families that seek to stretch their budgets wherever possible. Value Drugs intends to meet the needs

of this broad segment of consumers through the provision of low-cost, quality medications. The products

will be marketed as such, with an emphasis on their quality to distinguish Value Drugs products from the

more generic brands which emphasize price. In carrying out the above measures, Value Drugs expects to

establish itself as a the preferred brand in the market for which a wide-range of consumers will come to

recognize and trust.


Executive Summary 5

Unique Features

In addition to Value Drugs, there are three companies nationwide which provide discount pharmaceutical

products. Value Drugs, however, has several unique features which distinguish it from competitors in the

industry.

First, while the competitive advantage of any discount products manufacturer is its ability to compete on

price, the Value Drugs brand has a unique image among discount pharmaceutical products: that of a quality.

Where competing discount pharmaceutical products manufacturers attempt to capitalize solely on their on

their low price in relation to the major brands, they limit their appeal to value-conscious consumers. Value

Drugs, on the other hand, has attempted to create a brand identity associated with quality, as well as value.

Value Drugs believes that consumers are attracted to discount pharmaceutical products which emphasize

their quality in addition to affordability.

Therefore, while the perception exists among consumers that discount products are not as effective, Value

Drugs believes that a company such as it can further dispel this notion through clever advertising and

promotion which will substantially broaden its appeal among brand-conscious consumers. This strategy will

effectively allow Value Drugs to become the brand of choice for the value-conscious consumer and

potentially an even broader market segment.

Second, Value Drugs has and will continue to stress its proximity to local markets and its just-in-time

inventory system as a method for enhancing delivery of orders and providing quality customer service. By

continuing to focus on the local market, Value Drugs can fine tune its operations for both products and

establish limited brand awareness before expanding its scope regionally and nationally.

Third, Value Drugs will stress the reliability of its products. Consumers will be made aware of the fact that

the cough syrup and stomach-relief medications from Value Drugs are equally, if not more, effective than

the higher-priced, name brand products on the market. It will also offer tours of its facility in order to

emphasize the similarity of its operation with the multinational pharmaceutical producers, though on a much

smaller scale. In this manner, consumers will be more inclined to think of the Value Drugs products as the

same in quality, reliability, and effectiveness as the major brands, with the only difference being the lower

price of the Value Drugs products.

Marketing Objectives

Value Drugs has set as its marketing objectives expanding its local market share for stomach-relief

medication to 7% and capturing a 5% local market share for cough suppressants in the first twelve months

following expansion. The company will achieve its short-term objectives through an aggressive pull

strategy, involving heavy advertising and promotions based on its themes of product salability: quality,

reliability, effectiveness, affordability. The company’s long-term goal is to capture a 1% share of the

national market for each of its products within the next five years. This longer-term objective will be met by

gradually relying more on brand identity and name recognition in the local market and shifting its

advertising focus and marketing efforts to other regions of the country.


Executive Summary 6

Expected Accomplishments

Based on its experience in entering the pharmaceutical industry by introducing its cough syrup a short time

ago, Value Drugs expects to be equally successful broadening its product mix to include a stomach-relief

medication and expanding the production capacity for its cough syrup product to achieve greater market

share.

According to market conditions and company forecasts, Value Drugs projects the growth of its stomach-

relief medication to continue at a steady pace to the point where it expects gross sales to exceed $2.8 million

by the end of next year. Similarly, the introduction of its new cough syrup product is expected to bring in

initial sales of $2.3 million in its first year. Even given the costs associated with its expansion and the

company’s day-to-day operations, Value Drugs anticipates turning a modest profit in the coming year.

Required Capital

In order for Value Drugs to successfully complete its plans for expansion, an investment of $1,125,000 will

be required. The owner will contribute $125,000 of his own funds and is seeking a lender to provide the

remaining $1,000,000. The business anticipates the terms of the loan to be 6 years with an 8% rate of

interest that will be repaid in monthly installments.


The Business 7

The Business

Purpose Statement

The market for off-the-shelf pharmaceutical products, including stomach-relief products and cough syrups,

continues to expand. Individuals, when ill, have a tendency to look for a quick fix that will remedy their

problems with little downtime and minimal effort on their behalf. The pharmaceutical industry has

capitalized on this trend with advertising campaigns emphasizing stress-induced symptoms and aimed at

associating their products with fast relief. Consumers have responded, purchasing these products in greater

volume.

In addition to purchasing more each year, consumers continue to seek more choices in their form of

medication. Different forms (such as tablets, capsules, pills, and liquid), different flavors (i.e.-- regular, cool

mint, honey lemon, cherry, etc.) and different sizes (travel size, family size, etc.) are just three examples of

innovations in product availability which have contributed to increased consumer choice and enhanced

demand.

Prices for these off-the-shelf pharmaceutical products are being sustained at unreasonably high levels.

Three large multinational corporations, with enormous advertising and promotional campaigns and

distribution networks, have been able to set excessive price levels many times that of their production costs .

The size of these companies allows their production costs to be kept low, since they are able to take

advantage of opportunities such as vertical integration (in some cases they produce their own chemicals) and

economies of scale (much of their work is automated and they receive substantial trade discounts).

However, their size also makes overhead costs high. Their expenses for sales and promotional campaigns,

advertising, capital expenditures, research and development, and labor eat up much of their gross profit,

requiring them to sustain extraordinarily high markups in order to maintain their profitability.

Value Drugs seeks to take advantage of a relatively new phenomena in the industry -- the growing trends

toward value production. A group of companies has been emerging which are designed to compete with the

three major pharmaceutical corporations.

These companies have smaller research and development departments, much smaller advertising budgets,

and are usually less than 50 employees -- keeping operating costs to a minimum. These companies typically

have smaller gross profit margins, since they charge up to 50% less than the brand names. However, their

low overhead has resulted in a consistently profitable record of growth.

Most importantly, these companies fill the consumer need for inexpensive products. Value priced products

contain the same ingredients as those from top selling, name brand products, but sell at lower costs to

consumers due to smaller markups and an ability by smaller companies to keep costs to a minimum. These

products are valuable for all levels of consumers, but provide a special service to low-income and working


The Business 8

class families whose budgets can be severely impacted by repeat purchases of overpriced brand name

products.

Description of the Business

Value Drugs currently manufactures small quantities of its stomach-relief medication for a few local

discount stores. The company intends to expand its manufacturing capacity for stomach-relief drugs, and

will begin producing a line of cough syrups.

The company acquired its existing base of retail customers through industry contacts. The founder of Value

Drugs met the vice president for acquisitions of a local discount chain store at a social gathering, and he

urged Joe Formulary to go into business. This individual also provided Joe Formulary with the names of

several purchasing agents for independent area supermarkets and drug stores. Many of these individuals

expressed a desire to do business with a regional discount manufacturer which gave Joe Formulary the

impetus to start a pharmaceutical manufacturing operation.

The results from the introduction of the company’s lone product has been overwhelming, with Value Drugs

unable to meet the local consumer demand for discount stomach-relief medication. Orders for stomach-

relief medication exceeded capacity within the first month of operations.

The company’s sales have increased fairly consistently over the last two calendar years, with some seasonal

fluctuation. Peak sales for the stomach-relief product are realized during the summer months. However,

Value Drugs anticipates greater fluctuation in its cough syrup sales. Winter months typically produce the

largest sales volume for this product, and summer the lowest. Nonetheless, the product mix has been

chosen, in part, to maintain revenues throughout each respective seasonal variation.

Based on the demand for the current stomach-relief product and strong interest in a similar cough syrup

medicine (which Value Drugs does not currently produce), the time is ripe for expansion. Given the

company’s ability to expand its production capacity and add a second product (cough syrup), Joe Formulary

expects gross sales to exceed $5 million in the first year of expansion.

History of the Business

Joe Formulary founded Value Drugs in response a suggestion from a vice president of a local discount retail

chain store. This person had mentioned to Joe Formulary the potential for independent pharmaceutical

companies to substantially undercut the prices of major pharmaceutical companies in manufacturing and

selling products such as cough syrup and stomach-relief medications. Joe Formulary realized the potential

market for such products and decided to put his scientific and business backgrounds together to produce

products catering to the discount end of the price spectrum.

It was at this point that Value Drugs was set up as an S-Corporation owned and operated on a part-time

basis, solely by Joe Formulary in a laboratory facility in a converted garage outside of his home in Massive

City.

Joe Formulary recognized that cough syrup sales were vulnerable to heavy fluctuations in sales volume due

to variations in seasonal demand. He thus choose to begin his manufacturing operation with the production


The Business 9

of stomach-relief medication on a limited basis for trial purposes. Within two months, demand for the

product from retail discount stores, local independent supermarkets and drug stores, and other neighborhood

retail stores doubled to the point where his small operation was running at near capacity. Within six months,

demand had exceeded the limited production capability of both the company and Joe Formulary, himself,

based on the time and resources available to him. Based on this success, the time is now ripe for Joe

Formulary to concentrate all of his time and effort on the expansion full-time operation of Value Drugs.

Founder of the Business

Joe Formulary has recently resigned his position as chairperson of the Chemistry Department at Massive

State University. He held this position for twelve years, and served as a consultant for at least two dozen

medical and pharmaceutical companies during that time. He has also testified as an expert witness at many

trials involving questions of chemical composition and interaction.

Joe Formulary received his B.A. and M.S. degrees in applied chemistry at Prestigious University. He

worked for Pharmico, Inc. for seven years in their research and development department, perfecting trial

recipes for various pharmaceutical products. In 19XX he joined the staff of the Chemistry Department at

Massive State University.

In his last four years of teaching at Massive State, Joe Formulary attended classes on a part-time basis in the

M.B.A. program, completing his Master of Business Administration in May, 19XX.

Management and Operations

Pharmaceutical manufacturers require the following functions to operate successfully. First, adequate

chemists are required to actually mix each product. This job may only be performed by certified chemists.

Joe Formulary qualifies, and he plans to mix each batch of product himself, with the help of an assistant

chemist. He will be responsible for supervising the mixing of raw materials and overseeing the measuring of

the raw materials input. His assistant will perform the actual measuring and mixing responsibilities. In

addition, the assistant chemist will be responsible for keeping a log of all activities relating to the mixing

process. Joe Formulary also plans to give the assistant chemist responsibility for placing orders for

necessary raw materials.

Joe Formulary plans to hire one of his former students for a job as assistant chemist. There are several

potential candidates he has in mind, and all have adequate qualifications. Each has been notified of his or

her candidacy, and all have agreed to interview for the position. Joe Formulary has a close relationship with

all of these former students, as many were his teaching assistants at various times. He plans to compensate

this person in the $35,000 - $50,000 range.

Joe Formulary also plans to hire one salesperson. He has contacted one of his former students for

information about the responsibilities and compensation levels for such a person. Although that student is

not interested in the position, he was able to refer several persons to Joe Formulary. Joe Formulary has

determined that the sales person will be compensated at $35,000 per year, plus commission. Based on the

sales estimates, the total budgeted amount for this person’s wage is $60,000.


The Business 10

Joe Formulary plans to hire one administrative assistant to maintain computer records regarding inventory,

accounting, and correspondence. This person will also be responsible for answering phones, reception

work, and clerical duties. This administrative assistant will receive an annual salary of $40,000.

Finally, Joe Formulary needs five people to handle the bottling, packaging, and shipping responsibilities for

the product. This position can be filed by unskilled manual labor. Joe Formulary plans to pay these

individuals $7.80 per hour or $15,000 per year. For this, he has budgeted a total of $75,000.

Joe Formulary has budgeted a total of $305,000 for gross wages, leaving $85,000 as his salary for his first

year.

Joe Formulary has a management background from his work at Pharmico, where he supervised a staff of 15,

and from the university where he maintains a staff of three student assistants. Since most of the people he

plans to hire have industry experience, each will be helpful from a management perspective, especially as

the Value Drugs business grows and expands its scope.

Regulations and Licensing

The following permits and licenses were obtained in order for Value Drugs to commence business:

- Manufacturers permit, October 15, 19xx

- Permit to conduct business in Massive City, October 8, 19xx

- Sales license, October 31, 19xx

- Various FDA (Food and Drug Administration) licenses and permits.

All necessary licenses and permits to conduct medical research and produce pharmaceutical products for

over-the-counter sale have been applied for and granted to Value Drugs and its owner, Joe Formulary.

Objectives

Value Drugs has defined two primary business objectives for its planned expansion. The company’s short-

term goal for the year following expansion is to capture a 5% share of the local market for its new cough

syrup product and to grow its share in the local market for stomach-relief medication to 7%. From there the

company will seek to achieve a 10% local market share which, when realized, will trigger an expansion and

new direction toward penetrating the national market. Its long-term goal, as such, is a 1% share of the

nationwide market for stomach-relief medication and cough syrup as the company grows and its focus

evolves from local to national over the course of a five year plan. Value Drugs hopes to use this five year

performance as a platform to eventually expand into other pharmaceutical products.

Value Drugs intends to establish itself in the local market and meet its short term goals through an

aggressive push strategy involving intensive marketing, advertising and promotional campaigns aimed at

consumers in the local market. The intent of this effort will be to stir consumer demand for the company’s


The Business 11

products. This will, in turn, increase the presence of the Value Drugs products among local chain stores and

franchises by generating interest at the retail level.

In the long-term, Value Drugs intends to reach its goal of a 1% national market share by broadening its

scope and expanding outward from a strong local base. It is believed that the publicity achieved in the local

Massive City market will spread well in advance of distribution efforts, thus spurring the planned growth on

a regional, then national, level. Nonetheless, this eventual expansion will be complemented through focused

advertising and promotions efforts aimed directly at potential end-users of the company’s products. At the

same time, the company’s manufacturers’ representatives will be directed to shift their sales focus to the

national market by establishing contracts with the larger regional or national chain stores.

With the above steps in place, Value Drugs is poised to become the preferred brand for value pharmaceutical

products.


Market Analysis 12

Market Analysis

Market Research

Joe Formulary identified the need for discount pharmaceutical products when a local discount store asked

him to produce such products based on the demand from the consumers at his store. Contacting several

additional independent store owners in the local area (grocery stores, pharmacies, and other retail shops),

Joe Formulary found others interested in offering these items as well.

The national market for discount pharmaceuticals is well documented. The National Journal of

Business has reported that booming consumer interest in reliable value consumer products (such as

those that supermarkets produce) has broadened to include pharmaceutical products as well.

Finally, a recent edition of the Southwestern Daily Business Gazette named the Massive City area as a

specific example of an area where demand for discount pharmaceuticals was currently far exceeding supply.

The research Joe Formulary has performed has led to the conclusion that these trends will continue in a

positive direction.

Further research has identified distinct groups of consumers in the broad market for pharmaceutical products

by which the market can be segmented. The market can be broken into three distinct segments. First, those

price sensitive, lower income consumers who primarily purchase products based on the lowest available

prices make up a growing percentage of the market for pharmaceuticals. Next, an also growing segment of

middle income consumers tend to make purchasing decision based on value (the best quality at the best

price). Finally, higher income consumers, which make up a declining majority of the market, tend to be

brand conscious in their buying behavior, meaning that they purchase products based on the perceived

higher quality of major brands.

Based on this market research and company forecasts, Joe Formulary has developed a winning strategy for

capitalizing on the consumer demand for discount pharmaceutical products by effectively targeting certain

segments of this market. The following table (Market Segments) illustrates the results of the company’s

market research:


Market Analysis 13

Market Segments

SEGMENT Last Year This Year Projection Projection Projection Projection Projection

Sep 1998 Sep 1999 Sep 2000 Sep 2001 Sep 2002 Sep 2003 Sep 2004

Supermarkets (Tummysooth) $1,150,000 38% $1,050,000 32% $990,000 22% $945,000 17% $915,000 13% $895,000 11% $854,000 8%

Drug Stores (Nitesleep) $975,000 33% $1,000,000 30% $950,000 21% $900,000 16% $845,000 12% $810,000 10% $775,000 8%

Discount Stores (Both) $490,000 16% $650,000 20% $800,000 18% $995,000 18% $1,225,000 18% $1,489,500 18% $1,890,000 19%

Other (Both) $385,000 13% $600,000 18% $1,760,000 39% $2,840,000 50% $3,889,000 57% $5,150,000 62% $6,549,000 65%

Total Market $3,000,000 100% $3,300,000 100% $4,500,000 100% $5,680,000 100% $6,874,000 100% $8,344,500 100% $10,068,000 100%

Market Growth Rate --- 10% 36% 26% 21% 21% 21%


Market Analysis 14

Market Segments

Target Market

Consumers of stomach-relief and cough syrup medications are similar enough to be considered as

one target market. Thus, a dual product mix makes sense from a marketing perspective, apart from

economic reasons. According to Industry Week magazine, the two largest customer segments for each

product are parents (who make purchases both for themselves and for their children) and single individuals.

For stomach-relief products, there are also substantial sales to people with high stress occupations and those

who are accustomed to eating quickly. Busy executives, cab drivers, and air traffic controllers were cited as

examples of individuals who make up this part of the market.

More importantly, the company’s market research has determined that the fastest growing market segment is

the niche market composed of those individuals who prefer, and who give priority in their purchasing

decisions to, discount products. This segment of the market for pharmaceuticals has been identified as those

consumers whose primary consideration in purchasing decisions is the lowest available price. Further, the

market segment consisting of those individuals whose primary purchasing decision revolves around value

(i.e. the best quality for the best price) is also showing an upward growth trend as a percentage of the total

market.

These two growing market segments have been reflected in the trend in consumers preferences with regard

to point-of-purchase decisions. While supermarkets and drug store chains continue to be the major sellers of


Market Analysis 15

pharmaceutical products, their market share has shown a declining trend. This decline is accelerating and is

predicted to more substantially undercut their position in the market over the coming years. Discount stores,

in the meantime, have shown a rapid increase in gross sales and a corresponding upward trend in their

market share in contrast with the larger supermarket and drug store retailers.

Value Drugs expects to capitalize on this regional and nationwide trend toward the discount end of the

product spectrum by expanding its capability to provide low cost products which meet the needs of low

income and value conscious consumers, the two market segments the company intends to target. The

following table (Target Markets) illustrates these market segments in the context of the total market for

pharmaceutical products.

Target Markets

% of % of Sales

SEGMENT Targeted Last Year Projection Projection Projection Projection Projection

Population* Sep 1998 Sep 2000 Sep 2001 Sep 2002 Sep 2003 Sep 2004

Supermarket (Tummysooth) 22% 39% 37% 36% 35% 34% 33%

Drug Stores (Nitesleep) 35% 32% 29% 28% 27% 27% 25%

Discount Stores (Both) 10% 13% 17% 19% 20% 21% 22%

Other (Both) 15% 16% 17% 17% 18% 18% 20%

TOTAL 100% 100% 100% 100% 100% 100%

* Source: i.e. U.S. Census Bureau (1996)


Market Analysis 16

Target Markets

Competition

Pharmaceutical manufacturers for stomach-relief and cough syrup products are neatly divided into two

distinct categories within the industry: multinational pharmaceutical research and development companies

who outsource their production requirements or who have in-house manufacturing facilities, and the small,

independent pharmaceutical producers.

The multinational pharmaceutical R&D companies capitalize on their substantial research and development

capabilities. Their capital backing, brand recognition, advertising capabilities, sales budgets, and effective

distribution channels keep their products on the shelves and in consumers’ minds.

The much smaller, independent pharmaceutical manufacturers typically have a minimal research and

development function consisting primarily of labs used to analyze products other companies introduce.

They are usually very small (less than 50 employees), and have limited manufacturing facilities. They

usually distribute locally or regionally, occasionally maintaining a regional account in another part of the

country. These companies often compete on price due to the limited scope of the their operations. Value

Drugs fits into this industry cluster of independent manufacturers.


Market Analysis 17

The following table (Competitive Analysis) provides an overview of some of the key advantages and

disadvantages associated with the three large multinational corporations, as well as for the competing

independent manufacturers:

Competitive Analysis

Description VALUE DRUGS Pharmco Medico

Business Type manufacturingresearch &

manfuacturing

research &

manufacturing

Size of Business medium-small very large very large

Number of Employees (payroll) 1-200 32549 29140

Years in Business 34719 39 43

Market Share 16% 21% 29%

19xx Sales $480,000 $630,000 $870,000

Growth Rate 24% -2% 0%

Advertising Budget $19,200 $44,140 $26,100

Greatest Strength low overhead economies of scale economies of scale

Key Weakness ad budget overhead overhead

Price low high high

Quality of Service medium high high

Profitability high low medium

Advertising Effectiveness low medium medium

Strength of Sales Force high low medium

Standing in Industry low high high

Future Potential high low medium

Seriousness of Competition high low medium

Customer Profile

Value Drugs has compiled and continues to maintain a customer profile in order to continue to successfully

position and market the company’s products in the market place. All information has been derived

from the 19xx U.S. Census and an electronic database of local demographic information. The

following table (Customer Profile) represents a breakdown of the local market in the Massive City

area for pharmaceutical products:


Market Analysis 18

Customer Profile

Description Last Year Projection Projection Projection Projection Projection

Sep 1998 Sep 2000 Sep 2001 Sep 2002 Sep 2003 Sep 2004

Families

number of customers 25000 27000 30000 32000 35000 39900

average amount spent on medicines $1,500 $2,200 $3,000 $3,500 $3,850 $4,210

Discount Shoppers

number of customers 15000 17000 19000 21000 22500 24500

average amount spent on medicines $1,000 $1,500 $1,890 $2,200 $2,500 $3,000


The Product 19

The Product

Production

Value Drugs purchases its chemical inputs from reputable brokers in the Massive City area. These

chemicals are delivered to Value Drugs directly, and are kept in special sealed vats and drums in a

temperature controlled environment with specially secured locks. Only Joe Formulary has access to these

chemicals, as some of them are highly flammable. Because the planned expansion requires increased

complexity in the production process, this section describes the company’s planned production processes,

not its existing ones.

When Value Drugs is ready to mix a batch of either one of its products, Joe Formulary will supervise the

mixing efforts. The mixing will be an all-day task involving varying the temperature conditions in several

pressurized vats. The pressurized vats will be six-foot high pieces of equipment which hold several

thousand gallons of mixture. This vat will compress chemicals to remove tiny air bubbles and vapors. Next,

the chemicals will be automatically loaded onto an attached mixer in a highly compressed state, where they

will be mixed into a base.

Finally, the base will be poured by special lifting arms into a large vat for dilution. The dilution vat contains

special jets which inject the diluting agent (primarily water in the case of stomach-relief, and a water/alcohol

mixture in the case of cough syrup) into the mixed chemical compound. The vat has a special cover

designed to re-pressurize the mixture during the process and also contains large mixing blades in four levels.

The mixture process will typically take two hours for cough syrup and two and one half hours for the

stomach-relief medication.

The vat full of final product will be attached to a tube designed to deliver the product into a compressor,

which will compress and inject the substance into bottles placed under jets. There will be twelve jets

attached to the compressing device, and each one will have its own button. Depressing the button will cause

that jet to release the substance from the nozzle in the preset desired amount.

There will be very few hazardous activities associated with the manufacturing process. The machinery will

all have double-locking mechanical arms which will not permit operation while they are open, and will have

few moving parts on the outside.

The only hazardous elements of machinery operated in Value Drugs design scheme will be the rocking arms

which pivot the machinery, the forklift which will be used to move boxes of product from the floor of the

manufacturing facility to the loading dock, and the exterior of the two mixing devices, which will reach

extremely high temperatures.

Joe Formulary has, working with an insurance team, determined solutions for most of these problems.

Special insulation will be applied to the exterior of the machinery which will prevent burns and other

injuries. The pivoting machinery arms will be completely obstructed by a metal casing device which Joe


The Product 20

Formulary plans to weld and attach himself. Finally, employees will be instructed on the proper distances

and safety precautions necessary when working around a forklift, and will be educated on the lanes and

speeds used by the forklift during those few times it will be in operation.

Finally, given the company’s willingness to take these precautionary measures, his insurance company has

agreed to extremely reasonable workers’ compensation rates which will cover all work-related injuries in the

Value Drugs facilities.

Product Decisions

Value Drugs considered several options for adding another discount pharmaceutical product to its product

mix. However, the company chose to introduce a product that will have the greatest similarities to its

existing stomach-relief medication in terms of production requirements, marketability, and consumer

demand. Value Drugs has decided to add a cough syrup medication, thus, limiting its product mix to two:

liquid stomach-relief medicine and cough syrup.

These two products are believed to be the ones with the highest profit margin within the pharmaceuticals

industry, based on the market research Joe Formulary has performed. As well, the liquid forms of these two

products make them suited to the same production equipment and similar processes. Both products can also

be produced economically on a small scale. Finally, the consumer demand appears to be increasing for both

of these products even faster than the market average for over-the-counter pharmaceutical products in

general.

While each of these two products fill an important medical need, they do not compete against each other

since they are designed to remedy ailments associated with different parts of the body, the stomach and

throat. These areas also have different seasonal patterns of illness. Market research shows that cough syrup

sales are skewed toward the winter months when throat symptoms due to cold and flu are much more

prevalent. By contrast, sales of stomach-relief medications, while more consistent, are skewed slightly

toward the summer months when indigestion tends to be more common (possibly from the greater number of

picnics and barbecues).

Since most pharmaceutical products can be easily reproduced, Value Drugs has the potential to expand its

business by moving into other related product lines. Similarly, Value Drugs has the capability to use its

manufacturing equipment and laboratories in a flexible manner, adapting its production processes and

manufacturing focus accordingly.

Inventory

In its plans for expansion, Value Drugs has decided to use the just-in-time method of production and

inventory distribution, thereby, limiting the amount of inventory it keeps to a bare minimum. Typical in the

pharmaceutical business is a receipt of orders approximately two weeks in advance from retail distribution

outlets. This amount of lead time is ideal for just-in-time inventory planning, since production, bottling, and

shipping of the orders requires about one week. As well, retail distributors are typically happy to take

receipt of items two or three days early. Value Drugs, as such, will gear its production schedule around

guaranteed orders, thus producing in quantities according to specific demand.


The Product 21

The just-in-time method of inventory planning and delivery is a natural inventory management method,

because the existing and proposed products have an expiration date; retailers typically wish for quick

product delivery; and production capabilities are expected to be enough to match orders up to a high end of

estimated sales.

The use of the just-in-time inventory method obviates the need for complex calculations concerning the

optimal use of space to store products. Regardless, ample space exists for temporary, short-term storage of

products. This space is climate-controlled for proper storage and adequately secured by steel doors for

appropriate security.

Joe Formulary has purchased and customized a specific type of inventory software designed for

pharmaceutical manufacturers. This system tracks partial orders, invoices, shipments, and orders. Its tie-in

to accounting software allows Value Drugs to automate its own invoicing and collection process. This just-

in-time logistics planning will provide Value Drugs with a very efficient inventory system defined by rapid

turnover and minimal surplus stocks of product.


Marketing 22

Marketing

Objectives and Strategies

In introducing its new cough syrup product to the local market, Value Drugs has set its objective at capturing

a 5% local market share in the twelve months following the product’s roll-out. Further, it seeks to expand

its local market share for stomach-relief medication from 5% to 7% as a result of the increased production

capacity and aggressive marketing strategy associated with its expansion. In the longer term, the company

will seek to capture 1% of the national market for each of its products by within the next five years.

These objectives will be pursued through an aggressive pull strategy of advertising and promotions aimed at

end-users of the Value Drugs products. This approach is designed to stimulate demand at the retail level by

promoting the products to consumers who will then seek to find the medications on the shelves of the local

retail stores. This strategy will be supplemented with a direct sales push aimed specifically at purchasing

agents of chain discount stores, with a secondary target of purchasing agents for local and regional

supermarkets and drug stores. This push strategy is intended to communicate a specific message about the

Value Drugs products -- that the products will appeal to consumers more readily than products perceived as

generic. A secondary message aimed at retailers will emphasize that their product will be delivered more

quickly and more reliably than those of major corporations

The products will be marketed as low-cost alternatives to the expensive off-the-shelf pharmaceuticals sold

by the big three multinational pharmaceutical companies. Since many of the potential retailers being

targeted are already familiar with these products, Value Drugs will emphasize the unique selling features of

its products (for more information on this key point, please refer to section “unique selling advantage”).

Finally, Value Drugs plans to use its growing customer base in the first two years to slowly expand its

market concentration into other regions of the country. As the company grows and the marketing budget

increases, Value Drugs will slowly capitalize on its brand recognition in it regional base in order to increase

marketing and promotions activities in other regions.

Unique Selling Advantage

The unique selling advantage of Value Drugs is its ability to induce both price-sensitive and value-oriented

consumers to purchase its products through clever promotions and packaging. Value Drugs hopes to use its

expansion as a mechanism to amplify these advantages substantially.

While other companies are involved in the value pharmaceutical business, Value Drugs believes those

companies have taken an improper approach to packaging and promotion of their product. Most

independents have packaged their products in generic-type product labels with words such as “best value“ in

large, boldface type on the label.


Marketing 23

The company’s market research, as well as some recent articles in economics journals suggests that

pharmaceuticals are one product type in which many consumers believe that the expensive products are

substantially different (i.e. better) than their low-priced competitors.

This line of thought has been well promoted by the three large multinational companies which has fostered

the impression from consumers that major brand products are significantly better than their smaller

competitors in their ability to cure product-specific ailments. However, little has been done by the

independent producers to attempt to counter that image.

Value Drugs believes that independent pharmaceutical companies are doing themselves a disservice by

appealing to the value-conscious customers’ sensitivity to low cost alone. The company believes it can

attract a much more broad-based appeal if its packaging, labels and in-store promotions are as attractive and

quality-oriented as its large counterparts.

Value Drugs intends to sells its uniqueness in packaging and promotions not only to consumers, but also to

distributors as a reason its value products will actually sell more than one of the other independents. Value

Drugs believes that consumers notice the lower price, and also are educated by the company’s labeling and

promotions about the complete lack of a difference in quality between a Value Drugs product and that of a

name brand.

Selling Tactics

In its plans for expansion, Value Drugs will use manufacturers’ representatives, rather than its own sales

force, to sell its products to retailers in the local market. The manufacturers’ representatives will use a

direct sales strategy to penetrate the retail market. While Value Drugs will lose some control over the

selling function, the company will still coordinate the selling process so that it is consistent with the

company’s marketing objectives. Joe Formulary will also work closely with the representatives on such

policies as pricing, area, distribution and order-handling procedures.

The company’s primary sales goal is to win shelf space at discount retail chains, as well as supermarkets,

drug stores and gift shops. Joe Formulary believes that using this selling tactic will have two main benefits

in helping to achieve this objective. First, the company will not incur the costs of directly employing a full

sales force. Second, the manufacturers’ representatives have a sales network in place at the retail level.

This will allow Value Drugs to move its products into the retail outlets faster than if it sold the products

itself. It will also give Value Drugs access to retailers it might not otherwise have.

The following table (Sales Targets) illustrates the expected results of the planned sales effort:


Marketing 24

Sales Targets

Products/Services Last Year This Year Projection Projection Projection Projection Projection


Tummysooth

Cash Sales $289,140 $328,480 $797,300 $1,374,120 $1,622,540 $2,129,800 $2,796,550

Sales on Account $156,104 $293,182 $316,610 $295,865 $296,275 $288,525 $296,920

Nite sleep

Cash Sales $35,360 $96,960 $574,340 $1,022,960 $2,002,070 $2,424,350 $3,220,590

Sales on Account $152,404 $376,682 $462,490 $463,135 $443,725 $427,475 $460,980

Total Cash Sales $324,500 $425,440 $1,371,640 $2,397,080 $3,624,610 $4,554,150 $6,017,140

Total Sales on Account $308,508 $669,864 $779,100 $759,000 $740,000 $716,000 $757,900

TOTAL SALES $633,008 $1,095,304 $2,150,740 $3,156,080 $4,364,610 $5,270,150 $6,775,040

Growth Rate --- 73% 96% 47% 38% 21% 29%

TOTAL MARKET $3,000,000 $3,300,000 $4,500,000 $5,680,000 $6,874,000 $8,344,500 $10,068,000

Total Market Share 21% 33% 48% 56% 63% 63% 67%


Marketing 25

Channels of Distribution

The Value Drugs distribution chain will involve the following steps:

First, the company will source the chemical and raw material inputs from various suppliers on short-term

contractual grounds as needed. These transactions will be brokered by a middleman who will shop the

chemical and raw materials markets as demand conditions dictate to find the best prices for his client, Value

Drugs. As Value Drugs begins to form more industry relationships and as the company establishes a fairly

steady production schedule the supply channels are expected to become more concrete and longer-term.

Second, Value Drugs will source its packaging and labeling products in the same manner, where short-term

needs will be met as demand conditions dictates until a routine operating schedule is in place. Bottles to

contain the cough syrup and stomach-relief products will be ordered directly from the manufacturers as will

the cardboard boxes that will house cases of the end products.

Third, Value Drugs will use local and regional wholesalers to distribute to retail chains. In order to keep

inventory to a bare minimum, the production schedule for the Value Drugs products will be driven by new

orders. Value Drugs will solicit orders through the manufacturers’ representatives and will guarantee that

the company can fill and deliver those orders anywhere in the USA in 3 weeks or less. These

manufacturers’ representatives typically add a 2-3% markup on the Value Drugs wholesale product price.

Because of this fact, the financial statements do not reflect any commission for these individuals.

Pricing

Although the range of markups in the pharmaceutical industry for the products described in this business

plan is quite large, it is not very flexible at the upper and lower ends, and it does not change often. In fact,

both upper and lower limits have remained within a few percentage points of each other for the big three

multinational manufacturers since competition has existed. The entrance of independents into the market

introduced a lower pricing tier that, surprisingly, has affected the major companies very little.

Almost all of the independents tend to stay in the same price ranges for their products, since variable costs

such as chemicals and raw materials tend to be consistent the world over. Those competitors that

substantially exceed the lower tier price range or try to undercut it are not able to maintain a competitive

position for long. For those who undercut the lower price range set by the market simply cannot sustain

such a small profit margin. Likewise, those who exceed the upper end of the range price themselves in the

tier where they compete with the high-end, name brand products. As a result, sales plummet because they

cannot compete with the market leaders’ advertising and promotions efforts to establish brand loyalty.

Thus, the Value Drugs pricing policy is very much in line with the industry standard for the independents.

The following table (Price Comparison) illustrates this markup policy, as well as the markup policies of

competitors:


Marketing 26

Price Comparison

Products/Services Company Markup

Tummysooth Chemico 45-87%

Pharmico 41-92%

Medico 43-88%

Independents 25-44%

Value Drugs 33-42%

Nite sleep Chemico 43-89%

Pharmico 45-110%

Medico 52-109%

Independents 27-59%

Value Drugs 37-52%


Promotions 27

Promotions

Advertising

Value Drugs intends to run advertisements aimed at attracting the attention of purchasing decision-makers

for those retail stores which offer stomach-relief and cough syrup products to facilitate potential sales by

manufacturers’ representatives who will attempt to sell on behalf of Value Drugs. Ultimately, however, the

advertising will be directed at consumers in order to create a demand for the products which will further

spark demand on the part of retailers to carry the Value Drugs products on their shelves.

Value Drugs believes that the key factors motivating purchase by these people are, in order of importance:

1) price competitiveness of the items they purchase; 2) value of the products (highest quality for the best

price); 3) reliability and effectiveness of the products they purchase; and 4) ability of the items retailers

purchase to sell themselves.

Value Drugs knows that its products will be recognized as among the low priced leaders on the market.

Slightly more challenging in terms of an advertising theme will be the issue of quality. Most consumers are

of the mind set that because discount pharmaceuticals are less expensive than their name brand competitors,

the quality of the ingredients going into the discount products make for a less effective end-product. In

reality, the quality of the inputs is on par with the established multinational manufacturers. However, in

attempting to dispel this myth, Value Drugs will stress the quality of its products in its advertising message

to gain an association with the name brand products and to differentiate its products from its primary

competitors in the discount pharmaceuticals niche who tend to emphasize their value as opposed to quality.

Value Drugs expects to make a difference in the independent pharmaceuticals market with its unique

packaging design and in-store promotional displays. It will stress these characteristics in its ad campaign.

The major industry publications for retailers carrying pharmaceutical goods are Industry Week and

Discount Trade Source. Both of these publications have been targeted for advertising campaigns by Value

Drugs as prime places to emphasize the unique selling advantage its products will have.

It is believed not only that consumers will be more inclined to purchase a quality discount product, but also

that more retail stores will carry the Value Drugs products if they understand that the company’s packaging

and in-store displays carry themes of quality and reliability rather than themes of low price. Since

purchasing agents at these chain stores are very interested in the ability of these products to sell themselves,

Value Drugs aims to advertise this characteristic in their products.

Finally, this advertising theme will be reinforced with the mailings to purchasing executives and follow-up

calls to these people by the sales force (see the Selling Tactics section of this plan for more information).


Promotions 28

A complete budget and description of the planned advertising channels are laid out in the table (Advertising)

below:

Advertising

AMOUNT SPENT

MEDIUM Last Year This Year Projection Projection Projection Projection Projection


Industry Week (weekly trade

magazine)$5,000 $10,220 $32,540 $78,400 $84,200 $96,400 $84,200

Discount Trade Source (monthly

trade magazine)$10,000 $19,875 $28,000 $48,200 $36,200 $40,250 $47,210

Mass Mailings $5,100 $11,450 $30,000 $52,000 $56,500 $60,000 $67,000

Direct Sales through Executive

Sales Force$12,000 $23,100 $32,600 $68,480 $74,580 $87,500 $97,500

TOTAL SPENDING $32,100 $64,645 $123,140 $247,080 $251,480 $284,150 $295,910

GROSS SALES $633,008 $1,095,304 $2,150,740 $3,156,080 $4,364,610 $5,270,150 $6,775,040

Percentage of Gross Sales 5% 6% 6% 8% 6% 5% 4%


Promotions 29

Sales Promotions

Value Drugs has planned several promotional efforts for establishing its presence in the cough syrup market

and enhancing its position in the market for stomach-relief medications. The company strongly believes that

promotional selling is extremely important as a means to distinguish the product from among the field of

competitors, reinforce its image of reliability, and lend credibility to the marketing efforts of its direct sales

force.

First, Value Drugs has budgeted for the use of in-store promotional displays which stress the reliability and

effectiveness of both its stomach-relief and its cough syrup products. The company plans to produce

cardboard cutouts picturing male and female models standing back-to-back, one touching his stomach and

smiling, and the other touching her throat and smiling. The cutout will have the words “Value Drugs”

emblazoned stylishly across it, along with the name of the Value Drugs products.

Second, Value Drugs is offering a promotional sales incentive to manufacturers’ representatives which is

designed to five the company’s products priority over others in their efforts to sell to retailers. Over the last

ten years Joe Formulary has acquired enough frequent flyer miles on a major airline, whose miles do not

expire, for two free round trip first class tickets to the Caribbean. These tickets are fully transferable, and he

plans to offer them ,along with one week lodging accommodations, to the representative with the best sales

performance within one year of the company’s expansion.

Finally, Value Drugs plans to make substantial use of the availability of free samples to its prospective retail

customers. Those prospects showing interest in the Value Drugs product line will receive free samples for

their evaluation as a means of persuading the retailer to carry the Value Drugs line of products on its

shelves.

Publicity and Public Relations

Value Drugs plans to generate strong publicity through a strategic public relations effort.

Joe Formulary is a strong believer in maintaining solid business relationships, and has invested a

considerable amount of time and effort developing effective public relations skills. Joe Formulary is a

particularly effective speaker, and has often lectured at chemistry and pharmaceutical conferences. Now, he

plans to volunteer his time as a speaker at seminars for entrepreneurs arranged by service organizations. Joe

Formulary is also a member of the Lions Club in Massive City, and is a member of the Chamber of

Commerce in his district of the city. Each of these organizations has already expressed an interest in having

him as a motivational speaker on entrepreneurial issues.

Joe Formulary often volunteers his time at events sponsored by these organizations, and will make it a high

priority to encourage employees to volunteer for these types of organizations. To facilitate this effort, Joe

Formulary plans to begin a voluntary employee community service team. This team will have T-SHIRTS

emblazoned with the name of the company and the words “helping others in our community” as caption.

Ultimately, Value Drugs hopes to turn this public relations effort into positive publicity for the company by

encouraging employee participation and service to the community. Value Drugs will initiate friendly

rivalries with other area businesses – issuing their challenges through press releases and local free


Promotions 30

advertising – as a means of further establishing corporate and brand awareness as well as ingraining its

position in the local community. The result will be a positive net impact on the community, and on the

image of Value Drugs.


Risks 31

Risks

Description of Risks

Every business faces threats from various risk factors it may encounter. Value Drugs is no exception. A list

of considerations the company has addressed include:

> Competitive Response. There is little chance that major pharmaceutical companies will decide to slash

prices based on the Value Drugs expansion.For Value Drugs poses no real threat to the market share held by

each of the primary manufacturers in the industry. As such no competitive response is expected from these

major players that would negatively impact the position of Value Drugs in the industry. Similarly, the

smaller, independent manufacturers are unlikely to respond significantly in price, because they are already

operating toward the lower end of their potential profit margin.

However, it is likely that independent competitors will at least take a look at some of the innovative

techniques Value Drugs will implement. For example, there is a likelihood that the Value Drugs emphasis

on quality as a non-brand name may catch the attention of some competitors. If successful, these

competitors may seek to capitalize on the company’s emphasis on quality and change their labels and their

promotional techniques to take advantage of this successful marketing strategy.

> Cycles. Since the cough syrup business is especially seasonal (with winter being the period of greatest

sales), there is the risk that Value Drugs will not be able to meet its obligation to its creditors and employees

in the slower periods of summer due to revenue difficulties. There is a similar risk, though less serious, as a

result of the seasonal variation in usage of stomach-relief medication which tends to peak in the summer

months.

> Growing pains. While Value Drugs has had experience in managing personnel in the pharmaceutical

industry, there is a substantial likelihood that the company will grow extremely quickly, and will require the

employment of additional personnel. This growth will bring with it a series of operational and managerial

issues ranging from accounting and legal choices to marketing options, organizational structure and

personnel questions.


Risks 32

Contingency Plans

In its plans for expansion, Value Drugs has made plans to deal with the risks outlined above:

> Competitive Response. Value Drugs plans to make a quick and effective market entrance as the quality

leader among discount pharmaceuticals. Traditionally, the first company to introduce and land an in-store

display has priority on its space -- stores typically do not want too many displays (especially of competing

products) cluttering their aisles. Thus, a quick strike on the retail chain market will be especially effective at

locking out competitors who have yet to use this promotional tool. As well, a quick entrance is designed to

ingrain the notion that Value Drugs is the quality product among the variety of similar pharmaceutical

products on the shelf. Finally, if other brands switch their labels and otherwise follow the company’s

promotional strategy, the company plans to respond with an advertising theme that emphasized its position

as the quality leader in the market.

> Cycles. Value Drugs has chosen its product mix to offset the cyclical effect of cough syrup sales. The

company’s market research has shown that sales of stomach-relief medicine peak in the summer (especially

where active recreation, summer barbecues and picnics are common) . It is anticipated that this will, to

some extent, counteract the effect of diminished sales during slow periods in the sales cycle for cough syrup.

As well, the company plans to position itself from a capital perspective to be able to ride out the slower

months. The inventory planning system will reduce the amount of variable costs (chemicals) ordered during

that period of time to help keep costs down.

> Growing pains. Joe Formulary understands the difficulties that managing a quickly growing enterprise

can pose. He received his M.B.A. in what is widely regarded as one of the best entrepreneurship programs

in the country at Massive State University. There, he was exposed to many situations where successful

entrepreneurial enterprises had decisions to make that would determine their viability in a period of high

growth. Joe Formulary knows that rapid growth will require him to increasingly delegate responsibility -- a

characteristic he mastered in his successful management career at Pharmico. He also is committed to a

semi-annual personal assessment and evaluation of his management skills and the company’s direction. For

this, he has budgeted $15000 in outside services for next year to hire a consultant who is a regionally

recognized expert in entrepreneurial management decision making.


Finances 33

Finances

Sources and Uses of Capital

In order for Value Drugs to successfully complete its plans for expansion, an investment of $1,125,000 will

be required. The owner will contribute $125,000 of his own money and is seeking financing for the

remaining $1,000,000 from an outside source. The anticipated terms of the loan will be 6 years with an

interest rate of 8% that will be repaid in monthly installments. The table below (Sources and Uses of

Capital) represents the ways in which the funds will be utilized over a one-year period.

Sources and Uses of Capital

Description Amount

S O U R C E S

Business Loan $1,000,000

Owner Investment $125,000

TOTAL SOURCES $1,125,000

U S E S

Chemicals $363,750

Machinery $187,500

Salaries $93,750

Working Capital $93,750

Office Costs $115,125

Professional Fees $78,750

Miscellaneous and Reserve Fund $192,375

TOTAL USES $1,125,000

Uses of Capital


Finances 34

Balance Sheet

The following table (Balance Sheet) provides an overall picture of the company's assets and

liabilities.


Finances 35

Balance Sheet

Description Sep 1998 Sep 1999 Sep 2000 Sep 2001 Sep 2002 Sep 2003 Sep 2004

A S S E T S

Current Assets

Cash - Checking $56,717 $303,210 $1,766,500 $2,292,390 $3,095,800 $4,610,410 $7,241,262

Accounts Receivable $154,254 $344,254 $389,550 $379,500 $370,000 $365,000 $378,950

Inventory $112,566 $124,659 $189,776 $177,500 $225,000 $220,000 $238,950

Total Current Assets $323,537 $772,123 $2,345,826 $2,849,390 $3,690,800 $5,195,410 $7,859,162

Fixed Assets

Leasehold Improvements $34,150 $41,220 $189,200 $110,840 $105,510 $120,570 $123,640

LESS: Accum. Deprec.- Improvements $1,650 $1,780 $9,200 $5,340 $5,010 $5,570 $5,890

Total Fixed Assets $32,500 $39,440 $180,000 $105,500 $100,500 $115,000 $117,750

TOTAL ASSETS $356,037 $811,563 $2,525,826 $2,954,890 $3,791,300 $5,310,410 $7,976,912

L I A B I L I T I E S A N D E Q U I T Y

Current Liabilities

Accounts Payable $21,327 $58,242 $65,750 $76,500 $85,000 $120,500 $187,950

Notes Payable $51,633 $41,975 $16,400 $24,000 $26,000 $105,500 $132,600

Investment Loan Payable $0 $0 $1,168,540 $913,940 $672,140 $437,940 $211,540

Total Current Liabilities $72,960 $100,217 $1,250,690 $1,014,440 $783,140 $663,940 $532,090

Equity

Paid-in Capital $217,295 $534,595 $1,027,254 $1,542,892 $2,221,529 $3,935,248 $6,471,955

Retained Earnings $65,782 $176,751 $247,882 $397,558 $786,631 $711,222 $972,867

Total Equity $283,077 $711,346 $1,275,136 $1,940,450 $3,008,160 $4,646,470 $7,444,822

TOTAL LIABILITIES AND EQUITY $356,037 $811,563 $2,525,826 $2,954,890 $3,791,300 $5,310,410 $7,976,912

CURRENT RATIO 4.43 7.70 1.88 2.81 4.71 7.83 14.77

Cash Flow Statement

The following table (Cash Flow Statement) covers the Value Drugs cash disbursements for historical,

present and projected years.


Finances 36

Cash Flow Statement

Description Last Year This Year Projection Projection Projection Projection Projection


R E C E I P T S

Beginning Cash Balance $27,000 $1,394 $5,450 $544,680 $235,686 $298,712 $317,948

Cash Sales $324,500 $425,440 $1,371,640 $2,397,080 $3,624,610 $4,554,150 $6,017,140

Accounts Receivable $154,254 $325,610 $389,550 $379,500 $370,000 $351,000 $378,950

Owner Investment $150,000 $200,000 $125,000 $0 $0 $0 $0

Loan Proceeds $0 $0 $1,000,000 $0 $0 $0 $0

Total Cash Available $655,754 $952,444 $2,891,640 $3,321,260 $4,230,296 $5,203,862 $6,714,038

D I S B U R S E M E N T

Purchases (collateral material) $185,530 $366,115 $989,500 $1,289,600 $1,515,000 $1,895,650 $2,549,850

Advertising $32,100 $64,645 $123,140 $247,080 $251,480 $284,150 $295,910

Capital Equipment $0 $0 $56,040 $43,040 $72,080 $85,910 $57,206

Leasehold Improvements $29,028 $35,037 $160,820 $94,214 $89,684 $102,485 $105,094

Entertainment $2,500 $3,640 $12,000 $9,500 $14,800 $17,800 $19,630

Insurance $6,200 $7,800 $12,850 $15,400 $18,500 $22,458 $21,250

Legal Expenses $10,220 $14,530 $16,400 $32,100 $42,500 $45,800 $53,545

Rent $8,600 $9,800 $18,720 $22,650 $38,500 $42,100 $32,658

Office Supplies $4,280 $8,706 $10,400 $12,820 $27,500 $32,680 $42,500

Outside Services $8,400 $10,200 $15,000 $17,500 $18,500 $23,654 $21,369

Taxes (Fed. Sales, State) $73,200 $88,630 $96,400 $148,700 $257,800 $367,420 $487,400

Telephone $5,420 $6,420 $24,000 $18,500 $27,850 $29,654 $21,000

Selling Expense $25,000 $28,500 $85,400 $125,000 $227,540 $326,900 $432,100

Wages $215,650 $238,080 $375,600 $598,700 $924,500 $1,148,200 $1,463,820

Shipping $36,975 $52,706 $56,800 $58,540 $61,500 $125,874 $160,150

Miscellaneous $11,258 $12,185 $21,700 $26,430 $35,110 $38,540 $43,200

Loan Payment $0 $0 $202,790 $254,600 $241,800 $234,200 $226,400

Total Disbursement $654,361 $946,994 $2,277,560 $3,014,374 $3,864,644 $4,823,475 $6,033,082

OPERATING CASH $1,394 $5,450 $614,080 $306,886 $365,652 $380,388 $680,956

Interest Paid $0 $0 $69,400 $71,200 $66,940 $62,440 $58,750

ENDING CASH BALANCE $1,394 $5,450 $544,680 $235,686 $298,712 $317,948 $622,206


Finances 37

Cash Flow Projections

Income Statement

The following table (Income Statement) provides an overview of the company's income for historical,

present and projected years.


Finances 38

Income Statement

Description Last Year This Year Projection Projection Projection Projection Projection


EARNINGS

Gross Sales $633,008 $1,095,304 $2,150,740 $3,156,080 $4,364,610 $5,270,150 $6,775,040

COST OF GOODS SOLD

Beginning Inventory $47,500 $112,566 $124,659 $189,776 $177,500 $225,000 $220,000

Purchases $185,530 $366,115 $989,500 $1,289,600 $1,515,000 $1,895,650 $2,549,850

Less end of period inventory $112,566 $124,659 $189,776 $177,500 $225,000 $220,000 $238,950

Cost of Goods Sold $120,464 $354,022 $924,383 $1,301,876 $1,467,500 $1,900,650 $2,530,900

Gross Profit on Sales $512,544 $741,282 $1,226,357 $1,854,204 $2,897,110 $3,369,500 $4,244,140

GENERAL / ADMINISTRATIVE EXPENSES

Advertising $32,100 $64,645 $123,140 $247,080 $251,480 $284,150 $295,910

Capital Equipment Depreciation $0 $0 $3,923 $3,013 $5,046 $6,014 $4,004

Leasehold Depreciation $1,650 $1,780 $9,200 $5,340 $5,010 $5,570 $5,890

Entertainment $2,500 $3,640 $12,000 $9,500 $14,800 $17,800 $19,630

Insurance $6,200 $7,800 $12,850 $15,400 $18,500 $22,458 $21,250

Legal Expenses $10,220 $14,530 $16,400 $32,100 $42,500 $45,800 $53,545

Rent $8,600 $9,800 $18,720 $22,650 $38,500 $42,100 $32,658

Office Supplies $4,280 $8,706 $10,400 $12,820 $27,500 $32,680 $42,500

Outside Services $8,400 $10,200 $15,000 $17,500 $18,500 $23,654 $21,369

Taxes (Income) $71,200 $85,900 $96,400 $148,700 $257,800 $367,420 $487,400

Telephone $5,420 $6,420 $24,000 $18,500 $27,850 $29,654 $21,000

Selling Expense $25,000 $28,500 $85,400 $125,000 $227,540 $326,900 $432,100

Wages $215,650 $238,080 $375,600 $598,700 $924,500 $1,148,200 $1,463,820

Shipping $36,975 $52,706 $56,800 $58,540 $61,500 $125,874 $160,150

Miscellaneous $11,258 $12,185 $21,700 $26,430 $35,110 $38,540 $43,200

Interest Paid $0 $0 $69,400 $71,200 $66,940 $62,440 $58,750

Total Gen. & Admin. Expenses $439,453 $544,892 $950,933 $1,412,473 $2,023,076 $2,579,254 $3,163,176

NET INCOME $73,091 $196,390 $275,424 $441,731 $874,034 $790,246 $1,080,964

% of Gross Profit 11.5% 17.9% 12.8% 14.0% 20.0% 15.0% 16.0%


Finances 39

Income Projections

Break Even Analysis

Value Drugs has calculated its break-even point -- the point at which its sales will cover its costs. The

Average Variable Cost ratio calculation expresses the ratio of product cost to gross sales. The table below

(Break Even Analysis) displays the data used in these calculations, as well as the calculations themselves:


Finances 40

Break Even Analysis

Description Sep 1998 Sep 1999 Sep 2000 Sep 2001 Sep 2002 Sep 2003 Sep 2004

Average Sales/Month $52,751 $91,275 $179,228 $263,007 $363,718 $439,179 $564,587

Average Variable Cost

Ratio/Month0.33 0.36 0.50 0.45 0.40 0.42 0.44

Average Fixed Cost/Month $36,986 $46,032 $100,222 $133,315 $176,842 $216,744 $254,261

Average Monthly Sales Break

Even point$55,417 $71,956 $200,356 $241,606 $294,365 $374,810 $454,149

Ratio Analysis

The following table (Ratios) illustrates some of the critical ratios for Value Drugs based on the projected

financial statements in the previous sections:


Finances 41

Ratios

Ratio Sep 1998 Sep 1999 Sep 2000 Sep 2001 Sep 2002 Sep 2003 Sep 2004

Current Ratio 4.43 7.70 1.88 2.81 4.71 7.83 14.77

Quick Ratio 2.89 6.46 1.72 2.63 4.43 7.49 14.32

A/R Turnover 4.55 5.95 6.46 10.45 12.88 15.32 17.76

Inventory Turnover 1.07 2.84 4.87 7.33 6.52 8.64 10.59

Profit Margin on Sales 0.14 0.26 0.22 0.24 0.30 0.23 0.25

Rate of Return on Assets 0.21 0.24 0.11 0.15 0.23 0.15 0.14

Rate of Return on Equity 0.26 0.28 0.22 0.23 0.29 0.17 0.15


Finances 42

Cost Containment

Value Drugs is initiating an aggressive cost-control system as a means of limiting spending excesses as the

company’s expansion get under way. Given its relatively young position in the industry it is wise to control

spending while the business gains market share and gradually increases its competitive position.

Based on his business background, Joe Formulary has been able to map out a cost containment program and

a timetable for implementation. The table (Cost Containment) is a basic version of that timetable.

The self-directed cost audit containment will be comprised of several programs which will be used for

internal cost control purposes. The Cost Reduction Reward Program is designed to enable employees to earn

bonuses based on the projected cost savings of the suggestions they provide for improving business

operations. Joe Formulary believes that there is always room to improve and he would like to encourage his

employees to think about efficiency gains and potential reductions in the cost of such things as the

production processes, packaging, and advertising.

Further, an internal cost audit will be performed annually to evaluate the management structure and financial

operations of the company. However, at this point, given the designs for a relatively flat organization

structure and small-scale of operations, Joe Formulary feels the company will be organized for maximum

efficiency.

Additionally, a materials cost tracking program will be implemented in order to periodically evaluate the

sourcing of raw materials, equipment, packaging supplies, and the like to see if there is room for economic

improvement or efficiency gains in terms of channels or processes.

Finally, Joe Formulary has planned a fairly rigid employee wage and training budget for the first year.

Nonetheless, employees will be rewarded for their hard-work in helping the business become successful

through incentives programs, bonuses and other compensation. Further, considerable investment in training

has been budgeted for in order to educate employees from the start, as well as to upgrade their skills over

time.

Cost Containment

Item Program Name\Task Name Impl. Date Review Date Action Taken? Renewed?

1 Audits

Internal Cost Audits 1/1/19XX 1/31/19XX yes yes

2 Cost Tracking

Raw Material Cost Tracking 3/1/19XX 4/1/19XX no no


Finances 43

Assumptions

Value Drugs has used the following assumptions in the preparation of its financial statements. All

calculation methods adhere to Generally Accepted Accounting Principles:

> The method of inventory valuation was used on a last-in, first-out basis.

> The cash method of accounting was used.

> A straight line depreciation formula was used.

> A 12% annual rate of interest was assumed for accounts payable and accounts receivable unless otherwise

noted.


Conclusion 44

Conclusion

Justification for Loan/Investment

Joe Formulary is providing $125,000 in funding to expand the business of Value Drugs. The company also

seeks $1,000,000 from an outside source to meet the financial requirements of this promising endeavor.

This capital will be used to satisfy the company's expansion requirements as set forth in the Sources and

Uses of Capital section of the business plan.

The projected cash flow statement clearly shows the ability to pay even in a worst-case scenario situation.

Milestones/Timetable

Value Drugs has identified a few key benchmarks it seeks to achieve and has laid these goals out on a

timeline for company success. These objectives, when met, will give an indication of the success of the

expansion effort and will provide the foundation for the future direction of the company . The following

table (Milestones) depicts the name of the objective, the date the goal was set, the date action was initiated,

the target date for achieving the goal, and the current status:

Milestones

Milestone Date Adopted Date Enacted Target Date Current Status

Capture 1% of the market 8/15/19XX 8/15/19XX 7/15/19XX on schedule

Reduce raw materials costs 10% 9/12/19XX 10/1/19XX 6/1/19XX ahead of schedule

Form strong business relationships with local

drugstore owners10/1/19XX 10/18/19XX 12/31/19XX ahead of schedule

business plan value drugs

Documents

mission of value drugs

consent of value drugs

business fulltime

business purpose statement

relief pharmaceutical

major pharmaceutical

mission statement

product production