Table of Content
Introduction & Issue 2
Introduction & Issue
Biovail Corporation was one of Canadaâ€™s largest publicly traded pharmaceutical companies. The company operating internationally in all aspect of pharmaceutical products. Its major production facility was located in Steinbach, Manitoba. The company merged with Valeant Pharmaceuticals International in 2010. In the United States, Biovail distributed a number of pharmaceutical products which were marketed by strategic partners. On October 30, 2003, Biovail shocked the market by announcing revised guidance for 2004 and its financial results ...view middle of the document...
The estimated revenue associated with this shipment was between $10 million to $20 million. Biovail has confirmed that the manufacturing cost value of this shipment had been fully insured. In FOB shipping point, the company should recognize revenue at the moment/in the period in which product leaves Biovail shipping dock at the warehouse since inÂ that precise moment both ownership and responsibility over the goodsÂ is transferred from Biovail to theÂ client.
In this case, there was an agreement between Biovail and the Distributor provided that title to, and risk of loss with respect to, the product would not have passed to the Distributor until the product was delivered to the Distributorâ€™s facility. However, Biovail recognized revenues if itÂ was operating under FOB shipping point, probably in an attempt toÂ boast revenue for the period. Under the terms of "FOB destination", the title of the goods passes to the buyer when the goods arrive at their destination. Therefore, Biovail still hold the title of the shipment and was not allowed to recognize the revenue unless the shipment arrived to distributor.
In addition, Biovailâ€™s stock was listed on the New York Stock Exchange with accordance with U.S. GAAP. Under GAAP, revenue may be recognized on the sale ofÂ a product like Wellbutrin XLÂ when, amongÂ other things, delivery of the product by the seller to the buyer has occurred. The contractual delivery term between Biovail and Distributor, meant that Biovail would be entitled to recognize the revenue associated with a WXL shipment only when that shipment reached Distributorâ€™s facility. The truck carrying the WXL shipment was scheduled to reach Distributorâ€™s facility after September 30, 2003. Biovail, therefore, could recognize the revenue associated with the WXL shipment only in its fourth quarter which ended on December 31, 2003.Â On October 1, 2003, the truck carrying the WXL shipment was involved in an accident. However, given the f.o.b. destination contractual term, the truck accident had no impact on Biovailâ€™s revenue for its 2003 third quarter.
Revenue of the WXL Shipment
On the other hand, Maris has suspected that Biovail have significantly overestimated the amount of Wellbutrin XL on the truck. The truck accident misstatements were intended to mislead investors about the significance of Biovailâ€™s failure to meet its own earnings guidance.
Given that Wellbutrin XL tablet is estimated to be 1.5cm3 which include packing space and 18-wheeler trailerâ€™s dimensions are 17m x 4.5m x 2.5m. Assumed that 400% mark-up for the distributor as well as 35% wholesaler margin. The unknown is the number of truck needed to carry $10 million of products.
Biovail distributor wholesaler retailer
2.83/1.35% = $2.10
2.10/400% = $0.52
Truck volume in cm =1700 x 4500 x 2500cm= 191,250,000cm