This report discusses the concerns regarding the Biovail pharmaceutical company and the causes, implication and ramifications of its recently released quarterly earnings guidance. Specifically, this report covers Biovail’s reasons for missing previous expectations for quarterly earnings and an analysis of the validity of these reasons. The focus will be on the assertion that a recent truck accident containing a major shipment of Wellbutrin® XL was the primary cause of the company’s decreased earnings guidance.
In addition the report will verify the actual dollar value impact of the truck accident and why it fails to explain the entire decrease in earnings. The possibility that Biovail is using overly aggressive accounting techniques and the doubt on the sustainability of Biovail’s sales growth will also be analyzed. Biovail released an adjusted guidance that estimated third quarter revenues to be between $215 and $235 million. This was a $25 to $45 million decrease to the previously reported guidance Biovail released, which reported revenue expectations to be $260 million.
A press release claimed that an accident resulted in the loss of revenue, but the company also stated the revenue loss from the accident was in the range of $10 to $20 million. Using Biovail’s high estimate of revenue loss and low estimate of third quarter revenue expectations still results in missing the guidance by $5 million. Biovail’s uncertainty of the value of goods in transit shows poor operational management and, when combined with Brian Crombie’s claim of using FOB shipping point, implies inadequate accounting practices.
If Biovail was using FOB Shipping Point, as Crombie claimed, then the exact value of the goods should have been known and recorded as revenues on Sept. 30th when the goods left the Biovail Distributor (see exhibit 1). Since the ownership of the goods had been transferred, the Distributor would have been responsible for the losses from the accident. By accepting responsibility for the goods involved in the accident, Biovail implies that the ownership of the goods had not transferred; therefore, revenue should have never been recorded in the third quarter.
The revenue would not be recorded until the goods arrived in North Carolina on Oct. 2nd, which is the 4th quarter (see exhibit 1). Biovail’s estimate of the value of goods involved in the accident seems high. Using the limited information available regarding the amount of Wellbutrin® XL on the truck two different estimates were calculated with maximum ranges of $8 to $10 million (see exhibit 2). Based on the weight of the cargo and the revenue for each pill the maximum value of the shipment is less than $10 million (see exhibits 2 and 2b).
A more conservative approach is to estimate the weights of the drums and pallets used to transport the pills and subtract that from the total cargo weight to get a maximum value of $8 million (see exhibit 2). In addition to poor accounting practices highlighted by when revenues are recorded and the over-valuation of the aforementioned shipment, there are reasons to be concerned with the sustainability of Biovail’s sales growth.
As Jerry Treppel pointed out, sales of Cardizem® CD were still increasing, but Biovail states that Cardizem® CD is no longer under protection from a patent and generic drugs will erode sales for that product. Since this product represented 40% of Biovail’s product sales, it is a clear indication that this growth is not sustainable. The quarter ending June 30th had a loss of just over $1 million, giving further reason to doubt the sustainability of Biovail’s sales growth.
Biovail’s treatment of analysts who cover its company is worrisome. The mere fact that Biovail would make public statements about an analyst covering its company is a major sign of concern, regardless of what that analyst is reporting. Based on Biovail’s previous track record, any analyst dealing with Biovail should be concerned about the repercussions of his or her recommendations. In addition, if BAS placed an employee on leave because of Biovail’s recommendation it is further cause for concern.
Considering the above stated facts and estimations, it is very possible that Biovail is using aggressive accounting techniques to disguise other reasons for its recent decline in revenues. In addition, the sustainability of its sales growth is also a cause for concern. Biovail is almost certainly worried about the impact of lower revenues and any “sell” recommendations from analysts. Using past events as an indicator, it is advisable that any analyst tracking Biovail should tread carefully regarding any future recommendations regarding its stock.