Biovail Corporation Harvard Case Solution & Analysis

Ethical issues pertaining to Biovail’s treatment with analysts covering its stock:

BC treated the analyst covering its stock and recommended a sell in an unjust manner. This is because analyst needs to provide an unbiased recommendation to their clients where analyst is not influenced by any pressure and consider the genuine financial information and facts pertaining to a company. Actions taken by BC are representative of the company and its management behavior towards analysts as any action against the analyst by the targeted company (punishment or reward) actually impairs his independence that will actually affect the analysis of an analyst and hence will not allow him to present a just and fair opinion. BC took an action against Treppel and the analyst was not ready to step back from his sell recommendation, which developed further into a legal issue followed by Securities and Exchange Commission’s investigation where the analyst lost his position as well. This clearly reflects that a company’s actions can influence an analyst’s recommendation, as the next analyst covering BC was also sensitive over this issue. Though being convinced over a sell recommendation, this new analyst was still reluctant and was too much careful while making any sell recommendation.

JP Morgan noted that (i) Biovail remained firm on its estimate of $10 million to $20 million in Wellbutrin® XL revenues lost in the accident, (ii) Biovail’s low quality of earnings in the past should not be news to those familiar with Biovail, and (iii) poor earnings quality doesn't equal bad accounting. This reflects that they are of the point that BC is justified in its claim and its earnings drop is not an issue that needs to be covered up with a fake accounting record and window dressing as BC has already been facing decline in its earnings and revenues previously. Additionally, product sales declined from $287.6 million in first half 2002 to $284.6 million in first half 2003 and second quarter product sales also declined slightly. By stating this, JP Morgan’s analysts mean that there was no need for BC to cover its decline with a misstatement or truck accident issue as decline is not new for BC. In short, this is analysts’ perception about BC which seems to ignore any possible investigation of the facts.

Therefore, I would not be ready to act as an analyst to cover BC as its culture suggest a revengeful action against any analyst recommending sell based on the facts and investigation carried. So, being an analyst I might not be able to provide an unbiased report even if there are reliable evidences available for it. Further, by acting in such an unethical and unbiased manner, I would be out of my comfort zone due to this unethical and unprofessional behavior of the company which involves forcing analysts to be biased and fear from any possible investigation by regulators at any time.

Recommendation:

BC should have strengthened and designed its operations, internal control and earnings management in such a manner that allowed BC to achieve its earning guidance easily; this should be achievable and should not be designed high enough just to attract investors. Management did not need to cover any lacking by misrepresentations and any short comings in earnings and revenue should not be covered by fraudulent act and misrepresentations. In addition providing reliable information to investors while the behavior of BC towards analysts covering its stock should have been fair as they were doing their job based on investigations and facts available, whereas any possibility of misreporting and biased recommendations could have been challenged by the company solely in a fair, legal and ethical manner, grounded properly on facts and evidences. Such behavior could have saved BC from SEC’s investigation, legal case from the analyst and stock price decline due to the exposure of BC’s unethical and fraudulent acts. The new analyst, David Maris, should have solid evidence against the company in respect of accounting issue of revenue recognition before he recommends a sell to his clients..........................................

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