1.

INTRODUCTION Pharmaceutical industry was one of the largest and fastest-growing manufacturing industries in Canada, contributing approximately $6 billion to Canadian GDP in 2005 and boasting an annual industry growth rate of 7.7 percent. The pharmaceutical industry was research and development (R&D) intensive. In 2007, the pharmaceutical industry was responsible for $1.96 billion, or 19 percent, of total Canadian R&D spending. Each new drug required a great deal of R&D before it could be approved. The approval process started with preclinical testing and followed with an Investigational New Drug (IND) application with the Food and Drug Administration (FDA) before it could begin to test the drug on humans. A companys bottom line could suffer drastically if the FDA did not grant approval. 2. BRIEF HISTORY OF BIOVAIL 1990 Biovail Corporation, a pharmaceutical company, was founded and is headquartered in Mississauga, Ontario. The company engages in the formulation, clinical testing, registration, manufacture, and commercialization of pharmaceutical products utilizing various drug-delivery technologies in the United States and Canada. In addition, Biovail Corporation offers research, development, and clinical contract research services to third parties. 2001 Melnyk assumed the position of CEO of Biovail. The period of his tenure as CEO was focus of numerous civil, criminal, and regulatory investigations that severely increased expenses and legal fees and distracted the Biovail board and management. 2003 October 1, traffic accident occurred involving one of Biovails delivery truck. October 8, Biovailss stock dropped 33% on the TSX to $25.20 per share. Bank of America research report that labelled Biovails stock with a sell rating. 2006 In March, Melnyk brought action against 22 defendants (specific allegation were released againts Bank of America Securities) alleging a market manipulation scheme was the reason for the drastic decline in Bivails stock market price in recent years. In April, Melnyk found himself at the center of media attention as the OSC and SEC

acknowledge probable suspicious trading activity. 2007 In May, Melnyk and other Biovail executives received Wells Notices from the U.S. Securities and Exchange Commision. Also, finally Melnyk settled allegations from SEC and paid the OSC Cdn$ 1 million and agree to step down as executive chairman of the board directors. In June, Melnyk retired from the board of Biovail Corporation. Executive chairman was replaced with Douglas Squires and Willian Wells as the CEO Committee that was designed to insure independence and strategic appointment for Biovail leadership. 2008 In February, Melnyk was no longer employed by or a director of Biovail corporation or any of its subsidiaries. In March, OSC and SEC released a Statement of Allegations targeting Biovail Corporation and four former and current excecutives. 3. ISSUES Bank of Americas Research Report The inability for Biovail to meet its earnings forecast and the BoA research report labelled Biovails stock with a sell rating. BoA report showed many areas of Biovail company that can be criticised particularly at Biovail intentionally misstated in the press releases and public statements both the effect of the accident on Biovails third quarter earnings as well as grossly overstating the value of the product involved in the truck incident, which in fact had no effect on third-quarter earnings. OSC and SEC Charges On March 24, 2008, both Ontario Securities Commission and the U.S. Securities and Exchange Commission release a Statement of Allegation targeting Biovail Corporation and four former and current executive and the companys financial reports for 2001, 2003, and Q1 and Q2 of 2003. The SEC statement accused the company and its management team of chronic fraudulent conduct, including financial reporting fraud and other intentional public misinterpretation. The alleged financial reporting fraud involves (1) the improper use of a special entity, (2) revenue manipulation, (3) an intentional misstatement of foreign exchange losses.

Biovails chairman and CEO, Eugene Melnyk, also violated share ownership disclosure provisions by failing to identify his beneficial ownership held by several trusts in which he continues to exercise both investment and trading authority. Class Action Lawsuit A class action lawsuit organized the claims of numerous people, in this case shareholders, with a common interest to engage corporate entitites in legal action to rectify any immoral actions committed by these entities. A time period was established for the start and end of the claims period, and only holders of shares during that period were eligible to participate in the class action lawsuit. Once class-action certification was granted, all eligible shareholders were informed and prompted to contribute input. Eligible shareholders then became entitled to prorated portions of any awards received, net of legal expenses. Class action could be settled through negotiation agreements with corporation or they could brought to trial where a judge would render a decision. In order to gain negotiating leverage, the plantiff had to prove that management intentionally misled shareholders through their actions or through the information that they distributed and those actions lead to a destruction of shareholder value. 4. CASE ANALYSIS a. Biovail identification Bank of America use three expert accountants to studied Biovails press release about the truck accident and its affect to Biovails share price, also the transcripts, and most recent public fillings. From the evidences of truck accident, in photographs and videos of the accident scene, the noted that contrary to Biovails high damage estimates, one-third to one-half of the truck interior appeared to be empty. It means, the Bivail accusation that truck accident makes Biovail failed to reach the target in 2003 third quarter, cant be accepted. Another reference that led to Biovails sell rating is Biovails product sales growth had become negative in 2003. Other areas of criticism included Biovails declining R&D spending, its highly leveraged balance sheet, and the companys low tax rate. The report noted that in 2003, Biovails blue chip product was purchased rather than developed in-house. The companys balance sheet contained an extreanly high level of

debt relative to its peer companies. In addition, Biovails tax rate was 6.9% as compared to the next lowest tax rate in its peer group at 19.8%. Finally, the operating earnings reported by Biovail had different substantially from its earning as measured by generally accepted accounting principles (GAAP). This condition of gap between Biovails pro forma earnings and GAAP earnings portrayed the company was growing faster than its underlying organic growth. In 2001 and 2002, the income statement released by Biovail Corporation showed increasing in product sales and net income. However, in 2003, Biovail recorded unsatisfactory result which they blamed to truck accident. After the accident, Biovail issued a press release warning that the companys revenues for third quarter of 2003 would be lower than previously expected. Later, SEC accused Biovail for financial reporting fraud involving three accounting schemes that affected reporting periods from 2001 to 2003, including the improper use of a special purpose entity, revenue manipulation, and an international misstatement of foreign exchange losses. Biovail created a special purpose entity, Pharmaceutical technologies Corp. (Pharmatech), a development-stage company, to undertake an estimated $125 million in R&D activities on behalf of Biovail. Pharmatechs sole shareholder invested US$1 million, of which $350,000 was refunded as a fee. As well, the company entered into a share option agreement with the sole shareholder of Pharmatech permitting Biovail to purchase all of the stockholders Pharmatech shares at any time until December 31, 2006, in exchange for a fix purchased price. On December 27, 2002 Biovail exercised its purchased option as a result of Pharmatechs bankers refusal to extend financing directly to Pharmatech. SEC concluded, by these transaction Biovails financial reports were materially false and misleading, causing net income to be overstated. In October 2001, Biovail entered into an agreement with a distributor whereby Biovail would produce WXL which had not yet received FDA approval and then sell it to the distributor. Biovail threatening distributors to place an order for trade WXL prior to June 30, 2003 or the company would not fully commit its manufacturing facilities to producing WXL tablet in advance of the product launch. Then, the distributor sent

Biovail a purchase order, and Biovail invoiced the distributor for approximately US$8 million, resulting in an increased second quarter operating income of US$ 4.4 million. In December 2002, Biovail acquire the rights to certain drugs and assumed a liability denominated in Canadian dollars. Since Biovail reported its results in U.S.dollars, it was required to account for this liability in its financial statements in U.S dollars by converting the liability at the current rate. On March 31, 2003, the Canadian dollar had strengthened against the U.S dollar compared to its December 31, 2002 rate. Through the company correctly accounted for the liability in its 2002 year -end balance sheets; it continued to use the exchange rate from December 2002 on its March 31, 2003. As a result, the quarterly financial statements for first two quarters of 2003 did not reflect the resultant exchange loss or an accurate statement of the liability. Biovail overstated its net income by approximately US$5 million and US$4 million in the first and second quarters of 2003, respectively. b. Corporate Governance at Biovail Ownership and Managerial Control Ownership and managerial of Biovail is of the same person, who is Eugene Melnyk. Melnyk was the Chairman of the board of director during his tenure as a CEO and he remained as chairman until his resignation from the board in June 2007. He stepped down as CEO in 2004. Known as a person who does not let the slightest criticism from analyst and regulators pass. This is seen as a one-man-show and managerial opportunist, which leads to poor governance and bad strategic decision. The Impact To BIOVAIL In BIOVAIL, the strategic decision is solely based on the CEO cum Chairman of the board of director, Eugene Melnyk, Hence the transparency of the companys performance can be manipulated. Recent emphasis on corporate governance stems mainly from the failure of corporate governance mechanism to adequately monitor and control top level managers decision. This situation results in changes in governance mechanism in corporations throughout the world especially, with respect to efforts intended to improve the performance of board of directors. The truck accident incident in Oct 2003 and a restatement of 2003 financial

statements due to errors in foreign currency translations also reflected weaknesses in internal controls that had a negative effect on investor confidence. 5. CONCLUSION Biovials statement either in the form of financial reports or official statements that can be access publicly has provided information that is irrelevant with the actual state of the company. Biovails share price decline that has been accused at truck accident did not prove to be the main reason of the condition. Inappropriate financial report and decision making are allegedly made to benefit particular group or individual without regarding the interest of whole shareholders. 6. LESSON LEARNED Separation of Ownership and managerial control In this case, corporate ownership and control belong to the same person. The separation of ownership and managerial control is a basic legal premise suggesting that the primary objective of firm activities is to increase the corporations profit and thereby the financial gains of the owners (shareholders). Boards have the power to direct the affairs of the organization punish and reward managers and protect shareholders rights and interest. Task and appropriately structured and effective board of directors, protect owners from managerial opportunism such as that found at Biovail. In addition, board of directors is to renew emphasis on audit and compensation committees. Importantly, the reporting of the operating earnings of BIOVAIL adheres with generally accepted accounting principles (GAAP). Enhancing the effectiveness of the board of directors. Biovail case shows that all corporate owners are vulnerable to unethical behavior and very poor judgments in making decisions. The decisions and actions of a corporations board of directors can be an effective prevention to these behaviors. In fact, effective boards participate actively to set boundaries for their firms business ethics and values. As Biovail grows, apart from financial management, it is essential to improve the skills of the board in terms of risk management, operational oversight and communication among

the firm, as well as pharmaceutical experience and large public company board experience. The existence of market for corporate control Melnyk are assumed to be responsible to be formulating and implementing the strategy that led to poor performance. When the market for corporate control operates effectively, it ensures those managers who are ineffective or who act opportunistically are disciplined. Strengthening the assessment and of transparency and disclosure Biovail need to improve and to be transparent in financial disclosure. There are weaknesses, however, in disclosure relating to corporate governance. Many of these are voluntary disclosures about board practice that the company has historically chosen not to make public. This can be done by forming a new audit committee to address the outstanding issues that limited the effectiveness in the past.