Hypertension Surrounds Biovail


New York – Finally there is a little sanity in the Biovail situation—very little. In yesterday morning’s Financial Post, a Canadian business paper in Toronto, published an article entitled “Melnyk, Three Biovail Execs Accused of Fraud“. The firm settled on March 24, 2008 with the SEC, agreeing to pay a $10 million fine, without admission of guilt. Additionally, the Canadian drug maker will face the OSC (Ontario Securities Commission) on April 22, 2008 to look into actions by Biovail insiders.

There is an old saying that “a poor workman blames his tools”. In the case of ex-CEO Melnyk this has been revised to “an underperforming CEO blames the analysts”. Over the past four years Biovail has been immersed in legal and regulatory hot water, while framing critical analysts—which recommended selling the stock—as conspiring to sink Biovail’s stock price for profit.

Several research companies were named in these lawsuits, creating difficult times for these firms. As it turns out, the short recommendations were warranted by apparently fraudulent accounting and non-existent governance practices.

Recent events reflect a corporate culture that was clearly corrupt, vitriolic and litigious. Typically, corporate culture is imbued by the top executive of the corporation. This culture can be constructive or destructive. In the case of Biovail the corporate culture seeped down from then CEO and Chairman Eugene Melnyk. Mr. Melnyk’s blame psychology was evidenced in his comments about the current executive. Having resigned as CEO and Chairman only recently, he has accused Biovail’s top executives for the company’s sinking fortunes and has indicated that he may take back control of the company and take it private.

Accusations from Biovail even caused Banc of America to withdraw coverage of Biovail, believing that covering the company was more trouble than it was worth. However, a brief review of research coverage indicates that the company is still being covered by Wall Street, Bay Street and some independents.

There is a category of alternative research, which we term Management Quality analysis, which looks directly at the management’s track record, decision making process and psychological factors that can make or break a company’s valuation. One of these alternative research providers is Perth Leadership Institute, which covers firms according to the “financial signature” of the CEO. Another firm in this space is called Management CV, which assess the corporate management by its track record, current performance and about 21 other distinct metrics. Both firms could have raised warning flags, even before the forensics and earnings quality firms started to get uneasy.


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