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What's Really Banging Up Biovail?

By Diane Brady For Biovail Corp., a fatal traffic accident on Oct. 1 involving a truck carrying its product was one more piece of bad news. After two quarters of producing disappointing earnings -- and fending off questions raised by accounting experts about the quality of its earnings -- the Canadian drugmaker held a conference call with analysts and investors on Oct. 3, saying it would have to lower revenue expectations by up to 22% for the third quarter. Instead of booking $260 million to $300 million in revenue for the period, the range would likely be between $215 million and $235 million. "Contributing significantly to this unfavorable variance," Biovail (BVF) said, was the traffic accident.

According to the Mississauga (Ont.)-based company, the truck incident might take a huge chunk out of sales of its new antidepressant Wellbutrin XL -- not just for the quarter, but for the whole year. Although the product in the truck might not be damaged, Ken Howling, Biovail's vice-president for finance, said it would have to be inspected to be sure. That is, of course, the prudent thing to do.

Analysts, however, are raising questions about why Biovail would have to lower estimated sales for the fourth quarter, too. Investors fled the stock at the warning, lopping more than a third off the price since Biovail's Oct. 3 conference call (as of Oct. 7, it was trading around $25).

"MINOR PLAYER." In the Oct. 1 accident, a truck carrying some of Biovail's Wellbutrin XL drug was involved in a multivehicle pileup outside Chicago. Eight people died, but the truck in question escaped largely intact, says Illinois state trooper Doug Whitmore. He tells BusinessWeek Online that the vehicle carrying Biovail's pills was an "extremely minor player in the accident" -- with about $10,000 damage to the trailer and no product spilled on the ground. "They got rear-ended," Whitmore says.

Yet, two days after the accident, Biovail said the damage could cut $15 million to $20 million off third-quarter sales, which are set to be reported later in October. Without the revenue from that truckload, which was set to be booked in the third quarter, sales of Wellbutrin XL are expected to come in at less than $10 million for the quarter, according to Biovail. And because of the collision, the company reduced projected sales of the new once-daily antidepressant for the rest of the year. That's a heavy hit from one accident.

Biovail's Howling says the drugmaker, with $800 million a year in sales, is just being careful. On Oct. 8, the company said about 60% of the Wellbutrin XL shipment is salable and may be reshipped within the next 30 days. But it continues to be unclear about the exact value of the contents and says further testing at its Manitoba facility is required. And the explanation of the initial crisis still raises some questions for analysts.

SUPPLY-CHAIN ISSUES? Investors might be wondering whether revenues from Biovail's star drug were living up to expectations before the truck accident. Howling says sales of Wellbutrin XL, which got Food & Drug Administration approval on Aug. 28, are on track.

So why the rush to downgrade expectations for the rest of the year when Biovail has said it has ample production capacity to meet demand, and the tablets on the damaged truck might turn out to be suitable for sale? Howling reiterates that the company is simply being conservative until the damage is fully assessed.

The accident could affect the amount of product available for shipping in the fourth quarter, he notes, presumably because of supply chain or other issues. But the folks at GlaxoSmithKline (GSK), which distributes the drug to doctors and pharmacies, don't seem to be worried. "It has not caused any problems with stocking or supplying on our end," says GlaxoSmithKline spokeswoman Mary Anne Rhyne. "I think the pipeline was pretty full."

"UNDERESTIMATED POTENTIAL." One thing is for sure: Biovail has a lot riding on the success of Wellbutrin XL. Because it's a once-daily version of the popular antidepressant, analysts and company executives have anticipated a blockbuster. The twice-daily formulation, Wellbutrin SR (which Biovail doesn't manufacture), is the No. 1-prescribed antidepressant by U.S. psychiatrists, according to GlaxoSmithKline. And moving to a once-daily formulation could substantially boost interest in the brand as many doctors prefer the simpler dosage. Moreover, analysts say Wellbutrin doesn't carry the risk of reduced sexual function or weight gain associated with some other antidepressants.

"[Wall] Street has underestimated the drug's potential," says David Lickrish, an analyst with Punk, Ziegel & Co. He points to GlaxoSmithKline's consumer ad campaigns, its 8,000-strong sales force, and the strength of the Wellbutrin brand as positive signs. "Investors should focus on the end-user demand for Wellbutrin XL."

Until the accident, Biovail had been optimistic. On Feb. 7, it had predicted 2003 revenue of between $75 million and $150 million from the new drug. That estimate has now been reduced to between $60 million and $130 million. Howling says Biovail has so far generated $20 million in revenue from the drug. And investors had already started selling off Biovail shares before the accident. The stock peaked in June, at $51.30.

WHY NOT ASK? Banc of America Securities Analyst David Marris wants more information about how much product was actually in the truck. On Oct. 8, Marris initiated coverage of Biovail with a sell rating, citing the accident as something that "bears further investigation as there are serious unanswered questions about Biovail's statements." Howling notes that all details of the accident are being explored.

One might think the company could be more precise about how much was shipped on the last day of its quarter. Seems as though it would be easy enough to call Penner Trucking Co. in Manitoba and find out what the bill of lading shows. Says Howling: "We had just found out about the accident on a Thursday afternoon [a full day after it took place] and had a conference call the next morning.... We took a worst-case scenario."

Unfortunately, the Wellbutrin truck incident isn't Biovail's only problem. Contributing to its lowered third-quarter guidance are a delay in filling a backorder of Cardizem CD hypertension treatment supplied by Aventis (AVE) and credits issued to wholesalers by a distributor of a generic ulcer drug in which Biovail has a financial interest.

WRINKLED BALANCE-SHEET. Also, the Center for Financial Research & Analysis has raised questions over Biovail's quality of earnings. The Rockville (Md.)-based independent research firm issued two recent reports on the company, expressing concern over issues such as its rising debt load and its use of one-time items like a settlement from Pfizer (PFE) to boost earnings.

The CFRA estimates that a substantial portion of Biovail's earnings in the first half came from one-time items, and it puts Biovail on a 5 rating, indicating "highest" concern over its numbers. "We are concerned by the company's balance sheet," the CFRA says in a September report. Howling responds that "items that stem from our normal operating activities are appropriately included in our results."

He adds that Biovail will be in a better position to comment on the specifics of the truck accident as well as its financial guidance in its third-quarter earnings call on Oct. 30. In the meantime, investors may want to tread carefully when trying to determine this drugmaker's health. Brady is an associate editor for BusinessWeek in New York

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