Biovail Business Case Memo
Biovail Business Memo
In 2003 Biovail Corporation announced that it will miss its 3rd quarter earnings target by $25-$45 million, attributing $10-$15 million to a recent shipment loss. Being one of Canada’s largest publicly traded pharmaceutical companies with stock listed on both the Toronto and New York stock exchanges, the news raised concerns in the financial circles over the company’s accounting practices. Even Biovail’s claim that the shipment loss presented a revenue value of over $10 million was brought into question because of the TV coverage of the accident responsible for the shipment loss. The reports indicated that the truck was about a quarter full with Biovail’s antidepressant product Wellbutrin XL and nothing else. However, based on the cost of the product and size of the truck, the company’s assessment of the revenue loss was in fact reasonable, as it would take about 14.8% (calculations attached at the end) of the truck capacity to transport $10 million’s worth of Wellbutrin XL.
Financial analysts questioned Biovail’s inclusion of the revenue from product involved in the accident in the 3rd quarter, referring to the U.S. GAAP revenue recognition requirement: “revenue must be earned and realized or realizable in order for it to be recognized.” Biovail’s most recent filing with the US Securities Exchange Commission did state that the company recognized product sales revenue once the product was shipped to the customer, making it an ”FOB Shipping Point” type of contract and placing the responsibility for the shipment and associated risk of loss on the buyer. Nonetheless, the agreement between the Distributor and Biovail was such that the title and associated risk of loss of the product did not pass to the Distributor until the product was delivered to Distributor’s facility, making it an “FOB Destination” type of contract. Thus the revenue associated with the shipment to the Distributor should not have been recognized and claimed until
In 2003 Biovail Corporation announced that it will miss its 3rd quarter earnings target by $25-$45 million, attributing $10-$15 million to a recent shipment loss. Being one of Canada’s largest publicly traded pharmaceutical companies with stock listed on both the Toronto and New York stock exchanges, the news raised concerns in the financial circles over the company’s accounting practices. Even Biovail’s claim that the shipment loss presented a revenue value of over $10 million was brought into question because of the TV coverage of the accident responsible for the shipment loss. The reports indicated that the truck was about a quarter full with Biovail’s antidepressant product Wellbutrin XL and nothing else. However, based on the cost of the product and size of the truck, the company’s assessment of the revenue loss was in fact reasonable, as it would take about 14.8% (calculations attached at the end) of the truck capacity to transport $10 million’s worth of Wellbutrin XL.
Financial analysts questioned Biovail’s inclusion of the revenue from product involved in the accident in the 3rd quarter, referring to the U.S. GAAP revenue recognition requirement: “revenue must be earned and realized or realizable in order for it to be recognized.” Biovail’s most recent filing with the US Securities Exchange Commission did state that the company recognized product sales revenue once the product was shipped to the customer, making it an ”FOB Shipping Point” type of contract and placing the responsibility for the shipment and associated risk of loss on the buyer. Nonetheless, the agreement between the Distributor and Biovail was such that the title and associated risk of loss of the product did not pass to the Distributor until the product was delivered to Distributor’s facility, making it an “FOB Destination” type of contract. Thus the revenue associated with the shipment to the Distributor should not have been recognized and claimed until