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For all the intrigue swirling around how hedge funds may have beaten up Biovail Corp.'s stock price, an even juicier story has emerged about how Biovail alleges short sellers targeted the company's first in-house drug developed for its own sales staff.

Documents filed in Biovail's $4.6-billion (U.S.) lawsuit against a group of hedge funds and a securities research firm allege an attack against its newly launched Cardizem LA heart drug in mid-2003 drove a nail into the company's plan to transform itself into a fully integrated U.S. pharmaceutical company. It also prompted a U.S. government probe of its post-marketing Place (Providing LA through Clinical Experience) research program, the suit alleges.

When the dust had settled, court documents filed by Biovail allege that the U.S. misadventure cost the company an estimated $400-million as it cut its work force by 20 per cent, jettisoning 526 salespeople and retaining only a specialty sales staff of 85 U.S. representatives. It stopped selling Cardizem LA and sold two other drugs.

"The launch of Cardizem LA in 2003 was integral to transforming Biovail into a fully integrated pharmaceutical company," vice-president Ken Howling said in an e-mail. "While we are very pleased with our positioning and outlook for 2006, there's no doubt that you would be looking at a very different company today had the alleged events described in our complaint around Cardizem LA and the Place program not occurred."

Biovail's statement of claim alleges Wall Street hedge fund SAC Capital Management LLC was involved in "ghost-writing" negative and inaccurate research reports called "hatchet jobs" that were published by Gradient Research Alliance Inc. of Scottsdale, Ariz., as part of a co-ordinated scheme to drive down its stock price.

None of the allegations has been proven in court and SAC and Gradient have strongly denied the charges. In June, 2003, the first Gradient report said newly launched Cardizem LA would face "strong competition from other products in the Cardizem family (i.e. CD, SR and XL)." Court documents say Biovail owned the rights to Cardizem CD and SR, and wasn't actively promoting them to doctors, and no such thing as Cardizem XL exists.

Then on July 21, The Wall Street Journal and Barron's published separate articles highly critical of the Place program, which paid fees to thousands of U.S. doctors and their office staff for prescribing and collecting data on patients taking Cardizem LA.

That prompted the U.S. Office of the Inspector-General of Health and Human Services in August, 2003, to begin an inquiry into whether it was appropriate for Biovail to pay doctors and their office staff for prescribing Cardizem LA and collecting the data on patients. The investigation, which remains open, was part of a government crackdown on drug company incentives to doctors.

Biovail's lawsuit claims that four of the five doctors quoted in the two newspaper articles were consultants to various U.S. hedge funds, including Perry Capital and Great Point Partners, or to New York-based Gerson Lehrman Group, which matches its network of professional experts, such as doctors, lawyers and accountants, with business clients, such as corporations, non-profit organizations and institutional investors.

The most critical comments about the Place program came from New York cardiologist Emmanuel Goldberg, who wasn't even asked by Biovail to participate, yet was quoted as calling the study "unethical" and doubting the "seriousness of the research component," Biovail claims.

"Goldberg has since admitted . . . that Gerson Lehrman paid him to provide quotes for The Wall Street Journal and Barron's," the lawsuit alleges.

Dr. Goldberg declined comment and Gerson Lehrman chief executive officer Mark Gerson did not return e-mail requests for comment.

New York-based Perry Capital, which isn't named as a defendant in the lawsuit, had accumulated more than one million put options in Biovail in mid-2003, Biovail said in its lawsuit. That put the fund in a position for a windfall profit as the drug maker's stock price plunged to $19 from $50 in the past six months of trading in 2003 on the New York Stock Exchange. Richard Perry, the fund's founder, could not be reached for comment.

Two months ago, Perry Capital was informed by the U.S. Securities and Exchange Commission that it may face charges of violating trading and disclosure rules in a failed 2004 bid by generic drug maker Mylan Laboratories Inc. for another drug maker, King Pharmaceuticals.

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