Is Biovail a "broken company"

Analysis

It is often said that founders of companies find it hard to let go of their “baby”, which can be to the detriment of the future success of the company. This certainly seems to apply to the current battle between the management of Biovail and dissident shareholders, led by the Canadian firm’s founder, Eugene Melnyk, who established the company as Trimel Corporation in 1982.

As the current board of directors seek a new strategic direction and a clean break from the past, which is littered with corruption and conspiracy charges, Mr Melnyk’s group are gunning to replace the management team and re-instate former chief executive Bruce Brydon. Although both sides of the table would argue they are only acting in the best interests of shareholders, the sorry saga has resulted in Biovail's shares falling to nine-year lows of $11.61.

The crunch decision on key board appointments will arrive on June 25, the company’s annual general meeting, with both sides furiously filing proxy circulars to garner votes for their nominees.

Upping the ante

Mr Melnyk, who was forced to resign as chairman in June last year, but remains the group’s biggest shareholder with a 12% stake, initially raised concerns over Biovail’s management team in February with an open letter to the board.

Since then, tensions between the two sides have increased and the latest circular by Mr Melnyk claims that “Biovail is a broken company in desperate need of change” and that the company’s products are “either technologically infeasible or commercially unviable”. The mud-slinging continues as current chairman Douglas Squires, showing scant regard for the company’s founder, believes “shareholders face a choice between returning the company to the influence of Eugene Melnyk or moving forward”.

Even if Mr Melnyk is not successful in securing enough votes at the annual meeting to bring about wholesale changes to the board, his two other initial threats, to sell his stake or seek a buy-out partner, will then come into play.

New strategic direction

Earlier this month, the management team outlined a revised business strategy which has been met with a fair amount of scepticism. The company will move away from simply applying drug delivery technologies for extended release versions of existing drugs, and into the licensing and development of products, including new chemical entities, to treat central nervous system disorders, including Alzheimer’s disease, multiple sclerosis and epilepsy.

This change in direction will not happen overnight and the company has at least admitted it is unlikely to see any benefits from any of these new candidates until 2012. Some analysts have speculated the only way to enable such a quick turnaround may be through a company acquisition.

There are also considerable question marks over management’s guidance for $600m in R&D spend through to 2012, implying that this was a significant investment to make to match the new strategy.

However, analyst consensus forecasts for accumulated R&D spend between 2008 and 2012 already rest at $638m, taken before the strategy announcement. Credit Suisse analysts believe the $600m figure is what the company needs to spend at least every two years if the new strategy is to be a success.

Naturally, Mr Melnyk is particularly scathing, saying the new focus will be “absolute pharmaceutical suicide” given the risks associated with developing new chemical entities and garnering regulatory approval, especially in high-risk therapy areas such as Alzheimer’s.

Assessing underlying value

EvaluatePharma’s NPV Analyzer currently assigns a total value to all Biovail’s products at $2.67bn, significantly ahead of its current enterprise value of $1.45bn.

In addition, compared to its peers, consensus forecasts for free cash flow yield in 2010 sit at a very healthy 16.8%.

Free Cash Flow Yield % (Free Cash Flow / Enterprise Value) - Top 10 in 2010
  Free Cash Flow (Pre-Div) - $m FCF Yield Enterprise Value ($m)
 Medicis Pharmaceutical  202 20.6%  979
 Biovail  243 16.8%  1,450
 Sepracor  293 14.3%  2,051
 BTG  37 13.6%  272
 POZEN  42 12.7%  327
 Sciele Pharma  108 12.7%  848
 Questcor Pharmaceuticals  36 12.0%  299
 Eurand  66 10.5%  627
 DRAXIS Health  22 9.9%  225
 Omega Pharma  163 9.9%  1,647

Was Aplenzin worth it?

Importantly, the bulk of Biovail’s NPV calculation is generated from already marketed products. The only product that continues to have questionable value is recently approved anti-depressant Aplenzin, currently valued at $456m, based on the assumption it receives royalties and manufacturing revenues from a US marketing partner.

Aplenzin is based on a new salt formulation of bupropion, GlaxoSmithKline’s anti-depressant Wellbutrin, the extended-release formulation of which used to be a significant growth driver for Biovail.

Whilst the FDA approval last month was welcome, it came at least one year too late, as the 150mg dose of Wellbutrin XL that Aplenzin was developed to replace and extend the franchise patent life, is now available generically following launch by Watson Pharmaceuticals at the end of last week.

Although the company has been successful in listing a patent to 2026 on the FDA’s Orange Book, the ongoing search for a US marketing partner may struggle to materialise as potential suitors, with GlaxoSmithKline a natural favourite, question the value of Aplenzin to what is already available generically.

Whatever the outcome of the meeting in June, shareholders desperately need a resolution between the warring factions, as the current dispute and uncertainty over the future direction of the company is hanging heavy on the stock.

A small comfort for weary investors is that the proposed annual dividend of $1.50 will remain in place, just about the only issue the two sides can agree on.

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