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Biovail, Valeant merger a meeting of minds

Biovail CEO Bill Wells

ah/The Globe and Mail

When Bill Wells and Michael Pearson met a few months ago to talk about merging their respective drug companies, Biovail Corp. and Valeant Pharmaceuticals International , they had a lot in common.

Both had become chief executive officers in 2008 with a mandate to restructure sagging businesses. Both had to deal with the fallout from bitter legal battles with outgoing founders, Milan Panic at Valeant and Eugene Melnyk at Biovail. And both had been looking for a big acquisition to vault their ambitious restructuring efforts.

Given their complementary backgrounds, Monday's announcement of a proposed merger between Mississauga, Ont.-based Biovail and California-based Valeant seemed almost inevitable. The combined business will have roughly $1.6-billion (U.S.) in annual revenue, about twice the size of either company, and it will focus on four core areas - skin-care products, neurology medicines and expanding business in Canada and emerging markets. Biovail shareholders will own 50.5 per cent of the new firm and their Valeant counterparts will own 49.5 per cent.

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The new entity will carry Valeant's name and it will be based in Mississauga with Mr. Pearson as CEO and Mr. Wells as non-executive chairman. The stock and cash merger, valued at about $3.2-billion, requires shareholder and regulatory approval which is expected by the end of this year.

"Both companies came out of a similar past with interesting founders and obviously got into some issues and then needed to be pointed in a new direction.," Mr. Wells said Monday. "I think we've both been successful in reorienting our companies and we were both looking for the next big step for taking our companies forward. This just seemed like a very natural fit."

In a conference call with analysts, Mr. Pearson said the combination will "turbo-charge our growth strategy."

Mr. Pearson, a Canadian with a background as a turnaround consultant, made it clear there will be changes in the way Biovail operates. He plans to cut up to 20 per cent of the work force, or roughly 800 positions, and he will examine Biovail's research and development programs.

Mr. Pearson is not a fan of spending loads of money developing blockbuster drugs and he slashed Valeant's R&D budget when he took over two years ago. "A lot of people equate developing and launching a [drug]product to the movie industry where hundreds of millions are spent before an audience buys a ticket," he told analysts Monday. "If you want to design your strategy to be like the movie industry be my guest, but that will not be our strategy. Our strategy is that if things are working then you invest behind them to unlock even more potential, and if they are not working we cut off funding and redeploy it behind a winner."

He is also not a big believer in dividends, preferring share buy-backs instead. On Monday he said all shareholders will receive a $1-per-share special dividend once the merger closes, but no dividends will be paid afterward.

Mr. Wells said the R&D strategy fits with what he has been doing at Biovail. He said Biovail's R&D has been largely focused on late-stage products, which are generally lower risk.

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One of the big attractions of Biovail to any suitor is its tax structure. The company's tax rate is around 8 per cent because it has numerous operation in Barbados, a low-tax jurisdiction. That's a fraction of Valeant's tax rate, which is about 36 per cent, and it's one of the reasons Mr. Pearson plans to adopt Biovail's corporate structure for the new business.

As for the Biovail name, which will disappear, Mr. Wells said some people may miss it.

"But names really don't matter that much," he added. "What matters is organizational capabilities and can you really create value in the organization."




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