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Investors board Biovail after Fidelity takes big stake

Biovail CEO Bill Wells


A large investment from a leading mutual fund firm and the prospect of a lucrative merger have lit a fire under the shares of Biovail

The Mississauga drug maker has seen its stock rise close to 50 per cent since it said it would combine with California-based Valeant Pharma. a month ago. Most of that rise came just after the announcement, but the shares took another leap in the past few days after Fidelity Management and Research Co. revealed in a regulatory filing that it has taken an 11.8-per-cent stake in Biovail - almost 19 million shares.

On Tuesday the stock slipped, but at $21.71, it is still up more than 10 per cent in a week.

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"When we hear that Fidelity - one of the largest institutions in the world and well respected in the biotech and drug industry - has come in and taken a big position, it does lift [a company]" said Claude Camiré, an analyst at Paradigm Capital Inc. in Toronto.

Other investors - including institutions - will assume that Fidelity has done considerable research before taking such a large stake, Mr. Camiré said, and it makes them feel comfortable jumping on board as well. "[Investors]say 'I want to be part of what they are doing. They've done the due diligence, so I don't have to do mine.'"

Biovail spokesman Nelson Isabel said the company is thrilled to have Fidelity as its largest shareholder. "It is great to have them on board," he said. "We are very pleased by the support they are showing. They are one of the premier fund managers in the universe, so to have their support is very gratifying."

Until recently, the largest shareholder in Biovail was its founder, Eugene Melnyk. The relationship between the company and Mr. Melnyk soured after he stepped down as chief executive officer and chairman, and he unsuccessfully attempted to oust the board and management in a messy proxy battle in 2008.

Mr. Melnyk sold most of his shares in Biovail in March, cutting his final ties with the company.

Analysts appear to be increasingly enthusiastic about the prospects for the merged Biovail-Valeant, and not just because of Fidelity's backing. Eleven of the 13 who currently rate the company classify it as a "buy" or "outperform," according to Bloomberg.

Doug Miehm of RBC Dominion Securities pointed out in a recent report that the combined Biovail-Valeant had a pro forma price-to-earnings multiple of about 7 at the time the merger was announced (based on projected 2011 earnings). That was much lower than the average P/E of about 12 for comparable pharmaceutical companies. A multiple of about 9 or 10, and thus a stock price between $21 to $23 made more sense, he said.

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Analyst Annabel Samimy of Stifel Nicolaus & Co. in New York has the highest target price on Biovail, expecting it to hit $27 (U.S.) within a year. While future advances won't be as quick as in the last week, she said yesterday, "I think there is still more way to go."

Mr. Camiré of Paradigm Capital said the Biovail-Valeant combination is expected to increase revenue by about 5 per cent to 10 per cent a year, far outpacing most other drug companies around the world. It will also be "highly profitable," he said. "I'm very upbeat about the whole transaction because it expands the Biovail portfolio into different markets and different therapeutic areas."

The Biovail-Valeant merger is expected to be completed by the end of the year, after shareholder and regulatory approvals are received. A detailed proxy circular explaining the merger should be filed with regulators and sent to shareholders very soon, Mr. Isabel said.

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