Biovail subsidiary reaches deal with U.S. regulators over Cardizem drug launch

By Eric Shackleton, The Canadian Press

TORONTO - A subsidiary of Biovail Corp. (TSX: BVF.TO) has agreed to pay US$24.6 million to settle U.S. criminal allegatons related to the launch of Cardizem LA blood-pressure drug in 2003, part of the Canadian drug company's push to expand in the American market.

Biovail Pharmaceuticals Inc., the Toronto-area company's U.S. subsidiary, will plead guilty under the settlement with the U.S. Justice Department, which would require court approval.

Biovail said the deal would eliminate any criminal liability for the company, which is Canada's largest publicly traded drug maker.

"Without this agreement, the company was at risk of being excluded from doing business with any health program sponsored by the U.S. federal government," the company said in a statement.

The allegations relate to "prior management's actions in 2002 and 2003" regarding a clinical program called PLACE (Proving L.A. through Clinical Experience), which was part of Biovail's launch of the once-daily LA version of Cardizem.

Biovail didn't specify which "prior management" it was referring to and didn't mention whether any individuals are under criminal investigation.

During the period in question, Biovail Corp. was under the leadership of founder Eugene Melnyk who was chairman and chief executive. He has since relinquished his positions with the company and is currently at odds with the company's management and board.

In March, Biovail agreed to pay US$10 million to resolve U.S. allegations of civil accounting fraud and deceiving investors and analysts. Biovail didn't admit to any wrongdoing in its settlement and securities commissions in Canada and the United States are continuing actions against Melnyk and other current and former executives.

The U.S. Attorney's office in Boston, which is in charge of the case, said Friday that its criminal investigation continues.

Biovail's settlement comes on the heels of the company's urging shareholders to spurn any slate of directors proposed by Melnyk at next month's annual meeting, and instead support the company's new strategic plan.

In a notice of the June 25 meeting filed with securities regulators, the drug company says shareholders should vote in favour of its nominees, including newly appointed chief executive officer Bill Wells, as Biovail's future is on the line.

"Wells will lead the implementation of the new strategic focus designed to achieve sustainable growth for the company and enhance value for all shareholders," the Mississauga, Ont.-based company stated.

Duncan Fulton, a spokesman for Melnyk, said Melnyk's views on the proxy battle "will be clear in the circular that will be coming out shortly." Fulton didn't have an immediate response to the criminal settlement.

Wells, 47, recently left his position as chief financial officer of Loblaw Cos. Ltd. (TSX: L.TO) to join Biovail, whose share price has been flagging of late.

Biovail has said its new direction, following a strategic review led by Wells, aims to capitalize on a US$70-billion global market for treatments targeting diseases such as Parkinson's disease and multiple sclerosis.

The company has been plagued by sagging revenues, an expensive class-action lawsuit filed by investors as well as U.S. charges of civil accounting fraud and deceiving investors.

It has settled some of the litigation and the U.S. regulatory issues but still faces some unresolved issues with the Ontario Securities Commission and it is also battling with Melnyk, the former chairman and CEO, who disapproves of the company's direction .

Melnyk last week sent a letter to Biovail blasting the hiring of Wells and the more than $3.4 million in compensation promised by the company to Wells if Melnyk's dissident slate of directors is elected and Wells is fired.

Melnyk, who holds an 11.7 per cent stake as well as involvement in a family trust with about seven per cent of the company, stepped down last year amid probes of accounting and reporting irregularities.

On Friday, Biovail warned shareholders in its notice that "if Mr. Melnyk does act and nominates dissident directors, Biovail shareholders will be faced with a crucial choice."

The choice, say Wells and Squires, is between "a return to a Melnyk-influenced company with all that entails, or a new way forward with a new, independent and experienced board, a new strategy driven by a proven business leader, and good prospects for sustainable long-term value for all shareholders. . .Your vote will determine the direction of Biovail."

Duncan Stewart of Duncan Stewart Asset Management Inc. said "what we have here is the usual rhythm of a proxy battle, with two different visions of a company."

The strategic growth plan that Biovail put forward last week, he said, "is not a dumb plan. It is, let's get out of the drug delivery business of sustained release technology because it doesn't seem to be going well for us after six years of a declining share price."

Biovail, on the other hand, has some products they have invented that produce quite a lot of free cash flow, said Stewart.

"Their idea seems to be that we're going to take that free cash flow and we're going to invest in new chemical entities and new drugs focused on the central nervous system ... there's a lot of money there ... but it's more risky."

Melnyk's vision is a less risky one, said Stewart. He wants the company back, and to take this stream of cash flow and probably sell it to private equity and monetize the future cash flows right now.

"It's a lower risk more immediate return" plan, said Stewart.

Bovail has been mired down with problems from 2002 and 2003, when a class action lawsuit was filed by investors including the Ontario Teachers' Pension Plan. That litigation was settled for US$138 million late last year.

Late last week, Biovail reported a first-quarter profit of US$56.4 million, 35 cents per share, down from year-ago earnings of $93.8 million, 58 cents per share, as revenues dropped to $208.5 million from a prior-year $247 million a year before.

On the TSX Friday, Biovail shares closed up six cents at $12.79 on more than 2.6 million shares traded, but down from almost $29 a year ago and a peak of $90 in late 2001.