BKAL 3063: BIOVAIL CORPORATION

Table of Contents
1.0

Abstract........................................................................................................................... 2

2.0

Introduction..................................................................................................................... 2

3.0

Questions and answer....................................................................................................4

4.0

Recommendations........................................................................................................14

5.0

References..................................................................................................................... 15

BKAL 3063: BIOVAIL CORPORATION

1.0

Abstract

Biovail Corporation, a large pharmaceutical company and had applied advanced drug-delivery
technologies to improve the clinical effectiveness of medicines. It is recently had its stock
downgraded by a well-known pharmaceutical analyst and a number of other analysts were also
scrutinizing the company. The outcome was not favorable, as Biovail's acquisition methods were
labeled as unethical and their accounting practices were questioned. An investor with the
company must decide if she will continue to invest in a company that has been identified with
low ethical standards.

2.0

Introduction

Biovail Corporation was one of Canadas largest publicly traded pharmaceutical companies. Its
products

commercialized

both

directly

in

Canada

and

through

strategic

partners

(internationally). The company was very expert in the development and large scale of
manufacturing of pharmaceutical products. Besides that, Biovails stock had listed on both the
Toronto and New York stock exchanges. Biovail filed annual reports to the U.S. SEC and
prepared financial statements in accordance with both U.S. and Canadian generally accepted
accounting principles (GAAP). Biovail Company engaged activities on enhance formulate of the
existing drugs, clinical testing, manufacture and commercial pharmaceutical products and
utilized advanced drug delivery technologies. On 30 September 2003, there was a truck
carrying a shipment of Wellbutrin XL from Biovails manufacturing facility in Manitabo to
Biovails Distributor, North Carolina was involved in a multi-vehicle traffic accident near Chicago.
The company announced that the loss of the quarterly earnings which target by $260 million is
because of the truck accident happened. It contributed a significant unfavorable variance where
the company estimated that revenue of the truck that involved in accident was in the range of
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BKAL 3063: BIOVAIL CORPORATION

$10 million to $20 million. There are several issues in this case which included accounting policy
based on the revenue recognition; how Biovail Corporation should account the sales based on
two different Freight On Board (FOB) point which are FOB Shipping point and FOB
Destination point, and ethic of earning management where Biovail is suspected might
significantly overestimate the value of the product that involved in the truck accident due to
Biovail fail to meet its third quarter 2003 earnings guidance.

BKAL 3063: BIOVAIL CORPORATION

3.0

Questions and answer

1)

How many truckloads of product are actually required to carry $10 million of
product? Show your calculations.

Step 1
Based on paragraph 3, page 3,it stated that1 Wellbutrin XL tablet is estimated to be 1.5 cm3
which is including the packing space.
While for interior dimensions of a typical 18-wheeler trailer is 17m x 4.5m x 2.5m
Step 2
To make the calculation easier, we need to convert the trailer dimensions to centimetres before
calculate the volumes.
To convert meters into centimetres the ratio is: 1meter = 100 centimetres(End note 11)
17m= 1,700 centimetres
4.5m = 450 centimetres
2.5m = 250 centimetres
Step 3
The next step calculates the volume of wheeler trailer.
Volume of a rectangular prism = a x b x c
Volume= 1,700 x 450 x 250
Volume of 18 wheeler trailer = 191,250,000 cm3
Step 4
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BKAL 3063: BIOVAIL CORPORATION

To find out how many Wellbutrin XL tablets fit into a trailer
1.5x=191,250,000X = 127,500,000 (Answer)
Step 5
How much revenue (missing revenue) does Biovail get from a single pill?
Biovail + 400% (Distributor mark up) + 35% (wholesaler margin) = $2.83
(Refer page 3, paragraph 3)
Supply chain: Biovail Distributor Wholesaler Retailer
2.83 / 135%

= 2.10

135 % (35% + 100%)

2.10 / 500%

= 0.42

500% (400% + 100%)

The total value of tablet in one fully loaded trailer 127,500,000 x 0.42= $53,550,000
One truck can carry $10 million worth of Wellbutrin XL tablet product.

BKAL 3063: BIOVAIL CORPORATION

2)

How should the company recognize revenue based upon the two possible FOB
contract structures mentioned in the case? Why?

According to GAAP, four conditions must be met in order to recognize revenue:

1. Persuasive evidence of an arrangement exists: Although the case does not provide extra
information on this aspect, it seems clear that there is an ongoing relationship between Biovail
and the Distributor and that certainly there was a bill, purchase order and/or invoice in order to
support this sale.
2. Sellers price to the buyer is fixed or determinable: The case provides clear evidence in this
aspect.
3. Collection is reasonably assured: given the ongoing relationship between Biovail and the
Distributor, it appears evident that this aspect was probably covered as well.
4. Delivery has occurred or services have been rendered: this is the key point of conflict in the
Biovails case.

BKAL 3063: BIOVAIL CORPORATION

There are basically two different moments of revenue recognition according to the FOB
condition:
a. FOB Shipping: The company should recognize revenue at the moment/in the period in which
product leaves Biovail shipping dock at the warehouse since in that precise moment both
ownership and responsibility over the goods is transferred from Biovail to the client.
b. FOB Destination: The Company should recognize revenue at the moment/in the period in
which product is delivered to the Distributors facility since in that precise moment both
ownership and responsibility over the goods is transferred from Biovail to the client.
So Biovail should recognize the revenue based on the four condition that been stated.

BKAL 3063: BIOVAIL CORPORATION

3)

How does the accident affect the stated revenues under the different FOB contract
structures? Explain your reasoning.

Step 1
To calculate volume of full of trailer:
Interior dimensions of a typical wheeler trailer: 17m x 4.5m x 2.5m
Volume of a rectangular prism = a x b x c
Volume= (1,700 x 450 x 250 x ) cm3
Thus, volume of full of wheeler trailer = 47,812,500 cm3
Step 2
Calculate volume of a Wellbutrin XL tablet which was 0.5cm 3 and 1.00cm3as packing space
for each tablet :
Length x Width x Height = (1.5 x 1.5 x 1.5) cm3 = 3.375 cm3
Step 3
Calculate total tablets in the full of trailer:
47,812,500 cm3 3.375 cm3 =14,166,667 tablets
Step 4
Extract 400% mark up for Distributor and 35% wholesaler margin from the wholesale acquisition
price to arrive at the original price charged by Biovail which is $ 0.42 per tablet.

BKAL 3063: BIOVAIL CORPORATION

Step 5
Calculate the actual revenue:
14,166,667 tablets x $ 0.42 per tablet = $5,950,000 (estimated revenue)
Step 6
Additional information:
1liters = 1,000 cm3
1 U.S gallon = 3.7854 liters
Volume of full of wheeler trailer = 47,812,500 cm3 3785.4 cm3 = 12,630 gallons
12,630 gallons / 64 gallons drums = 197 drums
Therefore each 64-gallon drum consisted of 14,166,667 tablets 197 drums = 71,912 tablets

BKAL 3063: BIOVAIL CORPORATION

Reasoning:
An accident occurred on September 30, 2003 creates anin transit shipment loss of Wellbutrin
XL an antidepressant tablets causing Biovail to released guidance for the third quarter revenue
would be decrease as well as pushing down earning per share.
There are two types of FOB contract structure which is FOB shipping and FOB destination.
Biovail recognize revenue in third quarter that ends on September 30,2003 using the FOB
shipping method which the risk and benefit of ownership has transfer to distributor when the
trailer left Biovail facility. However, later on Kenneth Howling, vice president of Finance receive
an email and told Crombie to correct the statement because the agreement between Biovail and
distributor was FOB destination. Thus, FOB destination risk and benefit of ownership transfer to
distributor is recognizing only when the product has reach the distributor. However the product
did not receive by distributor because of the accident. Hence, the risk and benefit during the
accident is still under Biovail and has not yet transfer to the distributor.
Following the criteria of FOB destination, revenue should record the day on receive product by
distributor that will happen after September 30,2003 and the beginning of fourth quarter.
However, Biovail knowingly recognize revenue overstating third quarter result which ends on
September 30, 2003.
In addition, Biovail has claimed that the company estimate the lost revenue of shipment during
the accident occurred was range of $10 million to $20 million which was overstated revenue and
it is not legitimate. As per Melnyk stated This accident will have a negative financial impact on
Biovails third quarter revenues. Yet the estimated revenue from the accident is $5,950,000
which reflects a red flag.

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BKAL 3063: BIOVAIL CORPORATION

Initially, there are no specific benefits to recognize revenue in FOB shipping or FOB destination.
However, Biovail have recognize revenue for third quarter which was overstated revenue by
using FOB shipping because Biovail do not want to bare the risk and benefit of the tablets which
transfer it to distributor and to deceive investors to create the appearance of achieving the
earning goals. Biovail intentionally misstated both the effect of the accident on third quarter
earnings as well as the value of the product involve in the accident. In fact, the accident had no
effect on third quarter earnings. Therefore the accident was just a cover face of Biovail financial
report problem.
The accident was not the main reason of Biovailcondition. The accident was giving Biovail
opportunity to provide the marketplace with a partial explanation for the missed earnings
because Biovail has doing misleading of report in previous years and Biovailface manufacturing
problems.
Related to the accident, the products that are involved are still salable and the manufacturing
cost value is fully insured. Therefore, we believe that the revenue is not a lost yet and should
not recognize it.

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BKAL 3063: BIOVAIL CORPORATION

4)

Are you concerned about the companys treatment of analysts who cover the
stock? Would you want to be the analyst covering this company?

Yes, we are concerned about the companys treatment of analyst who covers the stock.
Treatment of analyst can see through case of Jerry Treppel, Jerry Treppel had reported that
Biovails revenue and earnings performance had not been high quality. He also highlighted that
sales of Cardizem CD represented 40% of product sales at Biovail and its reported sales has
increased at least 10 million more than previous quarter. Jerry Treppel also issue a report that
contained a sell recommendations, this come immediately with Biovail response, releasing a
number of public statements regarding Treppels report coverage, caused Jerry Treppel lastly
resigned his position. From this, could see that company had act tough in dealing this sell
recommendation report, taking no compromise, attack the report issuer, try many ways to
invalidate the report. This increase suspicion that Biovail presented misleading information and
try to cover it from discovered.
This situation could come with 2 perspectives, one from the perspective of future career and
another from the ethical perspective. From the future career perspective, be an analyst covering
Biovails stock could be a challenging job, challenged individuals ethical whether to reveal the
truth to public or silent it to get further job promotion. As see from the past result, become a
whistle-blower in analyst industry will unemployed at the end, because almost all the companies
afraid any minor financial report mis-present will reported once discovered. Silent the truth will
benefit by getting future job promotion, but it involved deceive investment clients, disregard right
of clients to know the truth to get promotion or high pay.
If we act as an analyst for Biovail, we will try our best to analyse the situation and come out with
a good solution without putting a Sell recommendation as first and last solution. Biovail is
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BKAL 3063: BIOVAIL CORPORATION

having a big loss for the quarter ended September 30, 2003, which means it is not a one year
loss. It is not easy to sell the company because as a big company for sure it has a quite number
of shareholders and in our perspective, Biovail still have a big market in Canada. Although they
have a substantial loss but they can get improve in their profit if they make a plan on recovering
the loss. May be Biovail can have a short-term agreement with the other pharmaceutical
companies to get co-operation from them in distributing Biovails products or any other business
activities.

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BKAL 3063: BIOVAIL CORPORATION

4.0

Recommendations

Based on this case, we came out with some recommendations. First, Biovail Corporation should
be more alert on the recognition term; especially for the revenue recognition because it can be a
misstatement of revenue and it leads the accountant to commits the fraud. As a big company,
suppose that Biovail Corporation should not have a problem regarding the recognition of
revenue because they are able to hire a professional in accounting department as well as to
follow the accounting standard and practice.
Second, Biovail Corporation should pay attention to the content of the agreement between
company and distributor in order to avoid miscommunication. There is a conflict between them
for the term of FOB. The conflict is about the terms of FOB shipping point and FOB
Destination. These terms are very important because it is relate to the recognition. Having an
agreement is a key to have a good business relationship because distributor is an important part
for Biovail Corporation.
Third, must avoid any fraud in presenting its financial reports. Biovail Corporation should make
an adjustment for its revenue since they already know that their practice in revenue recognition
is wrong and did not follow the U.S GAAP.

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BKAL 3063: BIOVAIL CORPORATION

5.0

References
1) Carton, B. (2010, September). Flashback: Accounting for Biovail's Truck Accident.
Compliance Week .
2) Anderson, J. (2006, February).Claiming Stock Manipulation, Biovail Sues Hedge
Fund.The New York Times. Retrieved from http://www.nytimes.com
3) Barr, A. (2006, February). Biovail sues SAC Capital, 21 others. Market Watch.
Retrieve from http://www.marketwatch.com
4) Acharya, M. (2014, April). Biovail, CEO mislead investors, OSC says. The Star.
Retrieve from http://www.thestar.com

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