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Tickers in this Article: BVF, WPI
Pharmaceutical giant Biovail (NYSE: BVF) has a stormy past. For years now it has battled in court with stock analysts, investment firms and regulatory authorities over alleged stock manipulation schemes. Now its best-selling product is facing generic competition. So, is there any light at the end of this dark tunnel?

Web Of Lawsuits
Biovail is involved is several lawsuits regarding both disinformation intended to drive down the price of the company's stock, and defamation of character of a Banc of America Securities analyst. In February 2006, Biovail sued SAC Capital and Gradient Analytics (a stock research firm) and other individuals, for $4.6 billion - alleging a campaign to drive down the price of the company's stock. In February 2007 the SEC ended its investigation of Gradient Research without bringing any enforcement action (however, this doesn't necessarily indicate how the suit will turn out).

Biovail then fired its law firm, Kasowitz Benson Torres & Friedman LLP, who filed the previous suit. The firm is accused of violating a protective order by using information obtained from Banc of America Securities in a different action. The firm denies ever receiving the protective order.

Finally, a federal judge has told company chairman Eugene Melnyk to stop delaying with the defamation lawsuit brought by Jerry Treppel, a former Banc of America Securities analyst.

Lawsuits tend to distract management from the more important job of running and growing the company.

Improper Trades by the Chairman
At first Melnyk denied trading in Biovail's securities without the proper disclosures, but he now admits it. (To learn more, see Defining Illegal Insider Trading.)

On May 4, 2007, an Ontario Securities Commission panel rejected a settlement with Melnyk over claims he failed to report trading in the company's shares as well as failed to disclose that some stock was held in offshore accounts. Then on June 22, 2007, Biovail acknowledged that Melnyk had filed a report on May 18, disclosing the historical trading of Biovail stock and call options in several offshore trusts. Biovail has also received a Well's notice from the staff of the Securities and Exchange Commission alleging violations of federal securities laws.

It doesn't look like this problem will go away soon.

Generic Competition
The company has indicated that generic competition will hurt its revenue in 2007. Specifically, Biovail's product sales for Wellbutrin XL. The drug's sales were $450.3 million in fiscal 2006, representing approximately 42% of Biovail's overall revenue. With certain defined exceptions, generic manufacturers may not market a generic version of the 150 mg dosage strength of Wellbutrin XL until 2008. However, this does not include the 300 mg version of the product, which will definitely hurt Biovail's results going forward. The possibility of the launch of a 150 mg dosage strength of Wellbutrin XL in 2007 would further erode revenue from this key product and have a material adverse impact on Biovail's financial condition and results. (Learn more about this innocuous sounding phrase in Red Flag Phrases: "Material Adverse Effect".)

In 2007, given the late-2006 launch of a generic formulation of the 300mg strength of Wellbutrin XL, the company may not reach the second-tier supply price, a key to higher margins from sales of this product. On June 13, 2007, Watson Pharmaceuticals (NYSE: WPI) received approval for a generic form of Wellbutrin XL and will begin sales of the product immediately.

Wellbutrin XL is a very important product for Biovail. The expected loss of revenue from generic competition will hurt sales of the company.


One Cockroach Down...

On June 30, 2007 Chairman Melnyk retired from Biovail. This represents a small step in correcting some of the company's problems. In investing (and in life), there is a principle that you never have just one cockroach. If you see one dead roach, it means there are many more lurking in the shadows and behind the walls. Biovail still has a long way to go. As a result, prudent investors should wait until the company has begun to solve its many problems before making a commitment.

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