Biovail Corporation was one of Canada’s largest publicly traded pharmaceutical companies. Previously, Biovail had applied advanced drug-delivery technologies to improve the clinical effectiveness of medicines. Biovail commercialised it product in Canada and international area in all aspects of pharmaceutical products which is development, manufacture, marketing, licensing, and distribution of pharmaceutical products for the treatment of chronic medical conditions. Its major production facility was located in Steinbach, Manitoba, Canada. Biovail receive bad impact when one of the trucks carrying a shipment of Wellbutrin XL was involved in a traffic accident near Chicago.
After the truck accident, the company have the problem with their recognition of the profit whether they should realize or not the revenue for the third quarter. The issue for the company is the concepts of revenue recognition that have been apply in the company to show their financial results. Should Biovail Corporation recognize its revenue using FOB shipping point or FOB destination. David Maris suspects that Biovail Corporation might have manipulated the result of their financial statement. This refers to fraudulent accounting of Biovail Corporation. David Maris, an analyst at Banc of America Securities (BAS) has investigate that Biovail might have significantly overestimated the amount of Wellbutrin XL on the truck.
1.2 PROBLEM / ISSUES OF THE COMPANY
From this case we are defined some issue. First Biovail Corporation have their problem in using the contract of shipping the product. That is two contracts that can be use FOB shipping point and FOB destination. That has a different in revenue recognize for FOB contract. This revenue recognition makes a big impact to the Biovail Corporation in their financial statement. Second, that has a conflict of interest that can be seeing when Maris takes over the account from Treppel. When Maris and his team start to do some investigation about the accident they found some curiosity about the report Third, there is a issue about the changes of contract that being made by Brian Crombic. He told the analysis that Biovail contract with distributor has changes to FOB shipping from FOB destination. The changes not get agreement from the distributor. 2.0 ANALYSIS OF INFORMATION
2.1 QUANTITATIVE DATA ANALYSIS
The calculation of how much of the truck would need to be filled to represent the missing revenue is shown below: Given:
a. 1 Wellbutrin XL tablet is estimated to be 1.5 cm3 (0.5 cm3 + 1.00 cm3) Each 300mg Wellbutrin XL tablet was estimate to be roughly 0.5 cm3 with an additional 1.00 cm3 per tablets for packing space.
b. A 18-wheeler trailer’s dimensions are: 17m x 4.5m x 2.5m Since the tablet and the trailer are using different units of measurements, we need to convert the trailer dimensions to centimeters before we can calculate the volumes.
To convert meters into centimeters the ratio is:
1meter = 100 centimeters
17m= 1,700 centimeters
4.5m = 450 centimeters
2.5m = 250 centimeters
To calculate volume:
Volume of a rectangular prism = a x b x c
Volume= 1,700 x 450 x 250
Volume = 191,250,000 cm3
c. To find out how many Wellbutrin XL tablets fit into a trailer 1.5x=191,250,000
d. How much revenue does Biovail get from a single pill?
Biovail +400% (Distributor markup) +35 %( wholesaler margin) = $2.83 per tablets Biovail ? Distributor ? Wholesaler ? Retailer
0.42 ? 2.10 / 500% ? 2.83/135%=2.10
e. The total value of tablet in one fully loaded trailer
127,500,000 x 0.42= $53,550,000
As we can see that, one truck can carry $10 million worth of Wellbutrin XL tablet product (at $0.37 revenue per pill). Based on the calculation above, it shows that Biovail was overstating the quantities and potential revenue impact the accident might have had. 2.2 QUALITATIVE DATA ANALYSIS
Concept can be defined as a general idea or notion that formed by mentally which combines all its characteristics or particulars. Based on the articles, we recognized that the article is applying several ideas or concept so that their operation is run smoothly. However, there is some weakness in the application of the concept that been applied by Biovail Corporation. Thus, we have identified several concepts that can be applied in the case.
Biovail Corporation SWOT Analysis
Biovail had applied advanced drug-delivery technologies to improve the clinical effectiveness of medicines Poor managerial strategy to meet goals.
Biovail commercialized its products in Canada and internationally Managerial unethical conduct and not reliability data enter accounting record Biovail’s core competency was its expertise in the development and large-scale manufacturing of pharmaceutical products. Bad reputation due to several issues:
1. Sacking of Jerry Treppel
2. Other analyst give bad review on its performance
If we take a look on the Swot analysis above, we can relate this analysis with several concepts. The concepts that can be applied are distribution theory, supervision theory and accounting standard violation.
Competition exists not only on the organizations but also on the supply chains, organizations are seldom worked alone and will form a lot of strategic partners or align with their suppliers so as to empower synergy. In the case of Biovail Corporation, it co-operate with one of largest pharmaceutical company in the world as its strategic partners in distributing its product to United States and also the rest of the world. This will make Biovail focus on their core competency which is the development and large-scale manufacturing of pharmaceutical products and outsource the other business (distribution of its product) to its strategic partners in order to make the business more efficient and effective than its competitors of other supply chains.
The performance of the supply chain is determined by the achievement of the collaboration of every party: “not until the last customer is paying satisfactory, every organization in the supply chain is not earning profit.” With this understanding, every organization in the supply chain has to move out all the obstacles between them and find out a win-win scenario which emphasis a startegic relationship. We can see this in the case, as one accident happen which lead to loss to Biovail, its strategic partners is the one that incurred the losses eventhough Biovail has claimed that the product that ought to be shipped to its partner has been insured. This indicate that, Biovail has breached the morality of the purpose of the strategic partnership.
The act can be claimed as not satisfying in term of distributor theory as only one company have stood up and be responsible to the accident. In the case also stated that the strategic partner of Biovail should not be responsible to the accident event because of the agreement between Biovail and the Distributor that say, the risk of the losses of the product will not be bear by Distributor until the product was delivered to the Distributor’s facility. We applying the distribution theory in this point because of the lacking of responsibility in the half of Biovail to take up the accident event to their account instead, some manipulation occur afterwards. We would like to say that the distrbution theory that practiced by Biovail has not been up to the standard that it should be and not satisfying.
Kurt Lewin is renowned for claiming: “there is nothing so practical as a good theory”. Theories allow us to make vast and complicated amounts of information into understandable concise pieces and to highlight the main issues or focal points of that vast amount of information. All mental health practitioners and their supervisors function according to at least one theory but very often many supervision theories and models. The supervisor’s challenge is to extend their appreciation of those theories to guide their supervisory work with practitioners. The statement above can be related to Biovail when the problem of less pallets of Wellbutrin XL that should be placed in the truck for shipment process. This has indicate the weakness of supervision in Biovail practices of management. If the management has conduct better supervision of the works of the employees, the problem can be contained much better by Biovail. Patterson, (1986) proposed what he considered to be the six most vital proponents of supervision theory:
Preciseness and clarity: containing clear, consistent, unambiguous wording. Parsimony or simplicity: containing the minimum of assumptions necessary to explain the focus of the point. Comprehensiveness: regarding the use of the known data in that particular area of interest. Operationality: in that the hypotheses and concepts are expressed in clear, evaluative terms. Practicality: or useful to practitioners.
Falsifiability: it is important that the theory can be disproved.
For the case of Biovail, we would like to address the relatedness of the vital proponents of the theory of supervision with the case of Biovail. First, we would like to relate the simplicity with the case. The assumption that has been used in order to fulfill the truck with the corrrect amount of the pallets is explaining the incapabilities of the supervision to monitor its workers. The second relatedness that we would like to have say is the comprehensiveness. The amount that present in the case is too big rather than the amount of pallets of Wellbutrin XL that have been in the truck which indicate the wildness of assumption of data that Biovail has used. The last relatedness of vital propenants of theory of supervision that we would like to address in this case is the operationality. It is shown in the case, the lack of supervision act in the truck loading shipment has affect the further issues with the concept of accounting or precisely the revenue recognition. The overestimation of the value of the pallets has influence the overall performance of the company. As conclusion for the part of supervision theory, Biovail, once again shown the lack of concern upon the practice of its management level which is supervisor. This lacking has caused for filling only one quarter of the truck equaling 8 pallets of Wellbutrin XL in a truck that can fit for 25 pallets of Wellbutrin XL.
Acounting theory – revenue recognition and its environment
Revenue is a key metric subject to considerable scrutiny by investors, analysts and other stakeholders. The timing and recognition of revenue is one of the top accounting areas of risk, with a high complex endeavor. According to the accrual principle, revenues are recognized when they are realized, and are earned (usually when goods are transferred or services rendered), no matter when cash is received. In contrast to cash accounting, revenues are recognized when cash is received no matter when goods or services are sold. In case the event triggering revenue recognition occurs before payment is received, the debit goes to accounts receivable and credit to revenue. In the case of Biovail, the recognition of revenue has been in doubt because of several issues that have been found out by the analysts. The first to be concerned by Biovail is the downgrading of stock by the analysts. Several analysts have indicated that Biovail stock performance has been form good to bad.
This is related to the revenue recognition made by Biovail. As mentioned above about the revenue recognition, the company has record of the performance that they would like to achieve (the guidance of $215 million to $235 million in revenue) which the amount is below from the last year guidance. The indication that can be state is, Biovail has too low of guidance in achieving its revenue. When the guidance is too low, the performance of the company will also be low because of overconfident to break the guidance. Relationship between Jerry Treppler an analyst at Banc of America Securities with other pharmaceutical company has seen him to be sacked and investigate by authorities. This is the indication of the conflict of interest between him and Biovail which made him to release the statement of “sell” Biovail to the Banc of America Securities.
Regarding to the case, there are two possible FOB contract structures that can be apply by Biovail Corporation. The first one is FOB shipping point and the second one is FOB destination. The FOB shipping point FOB shipping point indicates that the buyer takes responsibility for the goods when the goods leave the seller’s premise, means that Biovail would have recognized the revenue the same day it shipped as the sales arrangement was satisfied, service rendered, and a determinable sales price established. This means Biovail should recognize revenue once the product leaves Biovail shipping dock at the warehouse since both ownership and responsibility over the goods have been transfer from Biovail to the distributor. By this, the distributor should take responsibility for the goods as soon as they leave Biovail’s premises.
Conversely, FOB destination designates that the seller remains responsible for the goods until the buyer takes possession, mean that it would not have allowed Biovail to recognize the revenue until the shipment reached the distributor. Biovail only can recognize the revenue at the moment which product is delivered to distributor’s facility since both ownership and responsibility over the goods are transferred from Biovail to the distributor. In such a contract service is not rendered and, therefore, revenues are not earned until shipment arrival. Besides that, only big distributors are willing to bear the risk associated with FOB shipping contract structure. Normally small distributors are prefer the FOB destination contract structure because they no need to bear the risk once the goods are not arrive on their premises.
Based on this case, the company should recognize revenue via FOB destination as “The agreement between Biovail and the Distributer provided that title to, and risk of loss with respect to, the product would not have passed to the Distributer until the product was delivered to the Distributer’s facility”. In this scenario, using generally accepted accounting principles (GAAP) requirements, revenue cannot be recognized as the seller has not done everything required under the sales agreement. In this specific sales agreement, title and risk of the shipment remains the seller’s until received by the buyer. Therefore, Biovail is liable for shipping incidents. Understanding revenue recognition is important, this is because misleading or overlook some revenue will give a big impact to third party, especially stakeholders, shareholders, and potential investors. Regarding to the case, Biovail’s chief financial officer apply the FOB shipping point contract structure to all distributors.
However, Biovail’s vice president of Finance have change the contract structure from FOB shipping point to FOB destination once he receive call and email from distributors. He agrees to change the contract structure without discuss and notice the others within company. Because of communication gap between the chief financial officer and the vice president of Finance, there are contract structure problem with the distributors. Biovail Corporation should not change the contract structure in short period of time without any further discussion with other related parties. When distributors call and ask for change the term from FOB shipping point to FOB destination, Biovail must investigate well why so suddenly distributors request for the changes. If Biovail agree to change the contract structure, they must inform all the related staff and must have a new written agreement with the distributors to avoid future conflicts. 4.0 CONCLUSION
In conclusion, based on the analysis that has been made, Biovail Corporation should apply Freight On Board (FOB) destination in order to recognised their profit on sales. This mean, Biovail should record their revenue after the shipment arrives at the Distributor facility and ownership is transferred when the Distributor receives the shipment. It was clearly stated in the U.S G.A.A.P standard. After being analyse, we can conclude that the revenue from the accident truck not affect the stated revenue. If FOB shipping point applied, then the shipment occurred in Q3. As such, the accident would have no effect on revenue for the quarter, since delivery to the customer had already occurred at the time of the accident. If FOB destination applied, then the delivery could not have occurred by the end of September 2003 (regardless of the accident). As such, the accident again had no effect on the quarterly earnings. On the other hand, Maris also should give “sell” recommendation to Biovail Corporation due to the financial problems that have been shown in the statement end 30 June 2013.
Biovail have facing the losses before the truck accident. The company management also have intention to do fraud regarding the overstatement of the product shipment to the customer. It shown that from the quantitative analysis as we can see that, one truck can carry $10 million worth of Wellbutrin XL tablet product (at $0.37 revenue per pill). Based on the calculation above, it shows that Biovail was overstating the quantities and potential revenue impact the accident might have had. After the discussion, we decided that we will refuse to be an analyst for Biovail Corporation regarding to the several factors. In this case, we can say that there are exists the management problem in the internal management of the Biovail. The company have overestimated their products which involve in the accident. They might do that in order to get higher claim from the Insurance Company. If not, they might have some problem in inefficiency of the recording their selling product. Biovail also has a problem with the previous analyst which they were sued by Treppel in claiming defamation. If there was evidence that Biovail had misleading financial statements, it will taint my personality and good name. Thus, I better be honestly to tell the truth and give a suitable recommendation.
Vol. 3, No. 7 International Journal of Business and Management 2008 William CHUNG, The Roles of Distributor in the Supply Chain – Push-pull Boundary,[email protected]