Accounting & Tax

Herpes Drug-Cost Errors Spur Restatement

Biovail found a miscue in a schedule used to track quantities of Zovirax that the company can buy at discount.
Stephen TaubMay 10, 2007

Biovail Corp. has restated its 2005 and 2006earnings upward because of an understatement stemming from a data error in tracking discounts in purchases of Zovirax, a drug used to treat herpes, according to the company. The revisions boosted earnings for those years by $10.2 million and $7.7 million, respectively.

The Canadian specialty drug company reported that it unearthed the data error during the 2007 first-quarter financial statement close process. The miscue was in a schedule used to track quantities of Zovirax products that the company can buy at reduced supply prices from its marketing partner GlaxoSmithKline.

The schedule is also used to calculate long-term assets being amortized to cost of goods sold relative to the amount of Zovirax that can be bought at the reduced prices. As a result of the error, Biovail has restated the cost of goods sold in its income statement for the three months ended March 31, 2006 to adjust for an overstatement of amortization expense.

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The company added that as a result of the restatement, it must correct other known errors in prior-year periods that were previously thought to be immaterial. Biovail said it identified two such cases—one involving foreign exchange, the other related to the blood-pressure drug Cardizem LA.

As part of the restatement process, Biovail found that the data-input errors and the amortization calculation represented a material weakness. The company also concluded that the failure of later efforts of local management to find those errors in a timely way also represented a material weakness.

To address the material weaknesses, management is installing measures to fix the control deficiency where the amortization error happened, according to the company.

The measures include strengthening internal controls around the development and usage of spreadsheets and the review and analysis of those spreadsheets by local management. They also include mulling the automation of the spreadsheet-based data within the company’s enterprise-resource-planning system.

Biovail said it expects to implement those measures by the end of the second quarter of 2007.