APRIL 7, 2009
Biovail Corporation: Revenue Recognition and FOB Sales Accounting Background
Late on October 9, 2003, David Maris, an analyst at Banc of America Securities (BAS), was trying to interpret the shocking events of the previous few days and finish the write-up of his first report on the Canadian pharmaceutical firm, Biovail Corporation. Maris didn’t like what he saw at the company, but he never liked writing “Sell” recommendations. In any event, he wanted to make sure he was giving the best advice to his investment clients. Biovail Corporation was one of Canada's largest publicly traded pharmaceutical companies.1 For many years, Biovail had applied advanced drug-delivery technologies to improve the clinical effectiveness of medicines. The company commercialized its products, both directly (in Canada) and through strategic partners (internationally). Historically, its main therapeutic areas of focus had been central nervous system disorders, pain management, and cardiovascular disease. Biovail's core competency was its expertise in the development and large-scale manufacturing of pharmaceutical products. It leveraged this expertise by focusing on (1) enhanced formulations of existing drugs, (2) combination products that incorporated two or more different therapeutic classes of drugs, and (3) difficult-to-manufacture generic pharmaceuticals. In the United States, Biovail distributed a number of pharmaceutical products. These included Zovirax® ointment and cream (topical anti-viral drugs) and Cardizem® LA (for hypertension), which were marketed by strategic partners. In addition, Biovail distributed a number of branded off-patent products referred to as “Legacy” products. The Legacy products portfolio included the well-known brands Cardizem® CD, Ativan®, Vasotec®, Vaseretic®, and Isordil®. These products were not actively promoted by Biovail and represented non-core assets for which patent protection had
1 Biovail’s stock was listed on both the Toronto and New York stock exchanges. As a foreign private issuer, Biovail filed
annual reports to the U.S. SEC on Form 20-F and furnished interim financial statements on Form 6-K. In 2003 Biovail included in its annual and interim reports financial statements purportedly prepared in accordance with both U.S. and Canadian generally accepted accounting principles (GAAP). ________________________________________________________________________________________________________________ Craig Chapman, Senior Lecturer, Kellogg School of Management, prepared this case specifically for the Harvard Business Publishing Brief Case Collection. This case was prepared solely as a basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective management. This case was developed from published sources. Copyright © 2009 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
4011 | Biovail Corporation: Revenue Recognition and FOB Sales Accounting
expired. While the products were well respected by the medical community, prescription volumes were expected to decline as competing generic formulations became more readily available.2
The Truck Accident and Revised Earnings Guidance
A few days earlier, Biovail had released guidance for the quarter ended September 30, 2003, indicating that revenues would be in the range of $215 million to $235 million3 and earnings per share of $0.35 to $0.45,4 both below previously issued guidance. The company stated in its press release that the loss of revenue and income was associated with a significant in-transit shipment loss of Wellbutrin® XL,...