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APRIL 7, 2009

CRAIG CHAPMAN

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