TORONTO - Biovail Corp and its founder were so worried in 2003 that the drug company's quarterly results would not meet targets that they fabricated the effects of a fatal truck crash that destroyed a shipment of drugs, Canada's main securities regulator said on Wednesday.
The Ontario Securities Commission leveled the accusations against Eugene Melnyk in its opening arguments at a hearing looking into the company's accounting and disclosure practices.
The case dates back to 2001, but focuses specifically on a Biovail warning of a revenue shortfall following an October 2003 truck crash involving a shipment of Wellbutrin antidepressant, and the company's disclosure of the impact of that incident on its 2003 results.
(The accident) provided Biovail with an opportunity to provide the marketplace with a partial explanation for this earnings miss, an explanation which attributes a significant portion of the third-quarter revenue short fall to the truck accident, suggesting the truck accident was a one-time event and out of Biovail's control, OSC counsel Johanna Superina, said in her opening statements.
But Superina argued that Canada's biggest publicly traded drug company was worried in the weeks up to the end of the third quarter that it would not meet its previously released outlook for revenue of between $260 million and $300 million.
In fact Melnyk stated in a late August 2003 internal e-mail that we are having problems everywhere.
Superina charged that the company, in which Melnyk served as chief executive at the time of the accident, inflated the value of the drugs on the truck to between $15 million and $20 million to justify its revenue shortfall. Superina said the real value was around $5 million.
She also alleged the truck crash had no real impact on the third quarter as it occurred one day after the end of the period and would not have been considered revenue as it had not been delivered to the U.S. distributor, GlaxoSmithKline (GSK.L), until a few days into the fourth quarter.
Superina said that a series of Biovail press releases and conference calls misled investors about the true impact of the multi-vehicle crash outside Chicago, which killed eight people.
Melnyk contributed to the deception by approving the press releases and participating in the subsequent conference calls.
The OSC hearing, which saw repeated delays in starting, is scheduled to continue into the fall.
Earlier this year, three other former Biovail employees settled with the commission.
Biovail also agreed to pay $5.4 million, including $1.3 million in legal costs, to the OSC.
Last month Melnyk agreed to pay a $1 million fine in a case brought by the U.S. Securities and Exchange Commission.
($1=$1.27 Canadian) (Reporting by Scott Anderson; editing by Rob Wilson)
(In U.S. dollars unless noted)