Buyout Or Sellout Time At Biovail

By Eugene Bukoveczky | March 04, 2008 AAA

It's either buyout or sellout for Biovail (NYSE:BVF) founder Eugene Melnyk. He's so upset at the drug company's present management that he's prepared to go either way.

Bid or Bluff?
In a recent letter to the Biovail board, Melnyk expressed his dissatisfaction with management and declared his intentions to explore various options, including:
(a) taking the company private,
(b) selling his entire 11% position in the company,
(c) hanging onto his shares, or
(d) pursuing changes to the board.

This isn't the first time that Melnyk has tried to take back the company he founded. Back in 2005, rumors were swirling in the financial press that he was exploring a privatization bid, but nothing ever materialized.

Litany of Woes
So, why is he so upset with the present Board? Biovail stock has tumbled about 40% over the past year as the company has struggled to regain investor confidence following a series of corporate governance debacles. Over the past four years, the company has been investigated by the SEC regarding its accounting practices, paid out $138 million to shareholders in a securities-fraud class-action suit, and is now the subject of a U.S. federal grand jury probe regarding how it allegedly paid physicians to prescribe the Cardizem LA heart drug during its 2003 commercial launch.

Melnyk himself had to settle last year with the Ontario Securities Commission over alleged insider trading activity. Understandably, all this has resulted in the company having huge credibility problems, both with investors and Wall Street analysts covering it. (For related reading, check out Playing The Sleuth In A Scandal Stock.)

Generic Competition and New Drug Uncertainty
The company's over reliance on its key drug, Wellbutrin, is also a source of concern. Comprising about two-fifths of Biovail's total sales, the drug was a solid earner during the three years after its launch in 2003. However, when generic versions of the drug started hitting the market, including one variant produced by Teva Pharmaceuticals (Nasdaq:TEVA), sales began to nosedive. By the fourth quarter of 2007, prescriptions of Wellbutrin were down more than 50%. However, the company did manage to stave off another generic challenge when it reached an agreement with Watson Pharmaceuticals (NYSE:WPI) that will delay a generic version of Cardizem until April 1, 2009.

In the meantime, investor hopes remained focused on what may emerge from the company's new drug R&D pipeline. Biovail claims to have 10 new products in the works, with another four nearing New Drug Application status over the next few years, but has remained tight lipped on the development of these products, citing competitive reasons.

This lack of visibility on the new product development front is the main reason why analysts are now having to play a guessing game as they try to put a value on the company, should a buyout materialize. Most concede, though, that at around $14 a share, the price does not assign any value to the new product pipeline. When adding back the R&D expenditures of around $3-4 a share as a proxy for the value of new product development, a possible bid price range of $16.50-18.50 per share is seen as representing fair value. (To learn more about R&D valuation, see Measuring The Medicine Makers and Buying Into R&D.)

The Bottom Line
There's enough here for speculators to push the stock into the low end of the possible bid range. Any move beyond that point will depend on whether Melnyk can line up a partner to help finance a possible buyout deal. Last time around, he wasn't able to do so. Given the current unsettled state of the credit markets, debt financing seems unlikely. The only other options that spring to mind are venture or hedge fund money. Overall, it's just a guessing game at this point, and with what I'd view as limited upside if a deal does go through, I'd stay on the sidelines with this stock for the time being.

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