EX-99.1 2 a2176855zex-99_1.htm EXHIBIT 99.1

 

Exhibit 99.1

 

2006 ANNUAL REPORT

 

 

 



 

BIOVAIL AT A GLANCE

 

Biovail Corporation is a specialty pharmaceutical company that applies advanced drug-delivery technologies to improve the clinical effectiveness of medicines, and to develop controlled-release generic products. The Company’s therapeutic areas of focus are central nervous system (CNS) disorders, pain management and cardiovascular disease. Biovail drives business growth by commercializing these products both directly through its own sales and marketing division (in Canada) and/or through strategic partners. Biovail’s core competency lies in the development and large-scale manufacturing of pharmaceutical products incorporating oral drug-delivery technologies. Biovail has a broad portfolio of proprietary drug-delivery technologies that represent the foundation upon which the Company’s strategy is based.

 

Product candidates that meet a rigorous screening process are considered for addition to the Company’s development pipeline. To this end, development efforts are currently ongoing for a number of pipeline products, including novel formulations of bupropion and venlafaxine, separate combination products involving bupropion and tramadol, and a number of feasibility, or earlier-stage programs.

 

With approximately 1,600 employees worldwide, Biovail operates facilities in Barbados, Canada, the United States, Ireland and Puerto Rico. Shares of Biovail Corporation trade on the New York Stock Exchange (NYSE) and the Toronto Stock Exchange (TSX) under the symbol BVF.

 

1

Financial Highlights

 

 

2

Corporate Profile

 

 

8

Chairman’s Letter to Shareholders

 

 

12

Chief Executive Officer’s Letter to Shareholders

 

 

21

2006 Highlights

 

 

22

 

Payment of Dividends

 

 

 

22

 

Revised Dividend Policy

 

 

 

23

 

Elimination of Debt

 

 

 

24

 

Wellbutrin XL®

 

 

 

26

 

Ultram® ER

 

 

 

28

 

Regulatory, R&D Successes

 

 

 

30

 

The Power of Ten

 

 

 

33

Research and Development Strategy

 

 

 

34

Drug-Delivery Technologies

 

 

 

37

Product Pipeline

 

 

 

39

Commercial Portfolio

 

 

 

40

Financial Review

 

 

 

Executive Testimonials

 

 

 

19

Wendy Kelley

 

 

 

20

Kenneth G. Howling

 

 

 

29

Dr. Peter Silverstone

 

 

 

32

Gilbert Godin

 

This Annual Report contains forward-looking statements and investors are cautioned to review the “Forward Looking Statements” section in Management’s Discussion and Analysis on page 41. Investors should note that such caution is applicable to this Annual Report in its entirety.

 

 



 

FINANCIAL HIGHLIGHTS

 

Years ended December 31 [All dollar amounts expressed in thousands of U.S. dollars, except per share data]

 

 

 

2006

 

2005

 

2004

 

 

 

 

 

 

 

Product sales

 

$

1,024,085

 

$

884,267

 

$

837,102

 

 

 

 

 

 

 

 

 

 

Total revenue

 

1,070,529

 

935,536

 

879,156

 

 

 

 

 

 

 

Operating income

 

229,545

 

301,874

 

221,279

 

 

 

 

 

 

 

Operating income excluding specific items*

 

456,871

 

350,914

 

270,604

 

 

 

 

 

 

 

Net income

 

203,948

 

236,221

 

160,994

 

 

 

 

 

 

 

Diluted earnings per share (EPS)

 

$

1.27

 

$

1.48

 

$

1.01

 

 

 

 

 

 

 

 

 

 

Diluted EPS excluding specific items*

 

$

2.70

 

$

1.86

 

$

1.35

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

 

$

1.00

 

$

0.50

 

$

––

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,175,112

 

$

2,028,812

 

$

1,711,060

 

 

 

 

 

 

 

 

 

 

Long-term obligations

 

400,645

 

412,508

 

445,471

 

 

 

 

 

 

 

Shareholders’ equity

 

1,284,927

 

1,220,356

 

1,053,913

 

 

 

 

 

 

 

Cash flows from operating activities

 

522,517

 

501,879

 

279,566

 

Product
Sales

 

Total
Revenue

 

Diluted
EPS

 

Diluted EPS Excluding
Specific Items*

 

Cash and Cash
Equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term
Obligations

 

Shareholders'
Equity

 

Cash Flows from
Operating Activities

 

Number
of Employees

 

Closing
Share Price

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Millions of U.S. dollars, except EPS figures, closing share price and number of employees.

 


* Including write-offs of assets, contract-loss provisions, restructuring charges, acquired research and development, and litigation settlements.

 

For a reconciliation of GAAP diluted EPS to diluted EPS excluding specific items, please see page 47.

 

1



 

Corporate Profile

 

Biovail Corporation is a specialty pharmaceutical company that applies advanced drug-delivery technologies to improve the clinical effectiveness of medicines, and to develop controlled-release generic products. The Company drives business growth by commercializing these products both directly (in Canada) and through partners (in the U.S. and other markets). Biovail’s main therapeutic areas of focus are central nervous system (CNS) disorders, pain management and cardiovascular disease.

 

The Company’s core competency lies in its expertise in the development and large-scale manufacturing of pharmaceutical products incorporating oral drug-delivery technologies. Biovail has a broad portfolio of proprietary drug-delivery technologies that represent the foundation upon which the Company’s strategy is based. Biovail continues to differentiate itself from competitors in the drug-delivery industry through its proven track record of success in developing and manufacturing large commercial quantities of controlled-release drug products, including Wellbutrin XL®, Tiazac®, Tiazac® XC, Cardizem® LA and more recently, Ultram® ER.

 

The Company’s broad portfolio of oral drug-delivery technologies includes controlled release, graded release, enhanced absorption, rapid absorption, taste masking, and oral disintegration, among others. These technologies can be combined to develop, for example, a controlled-release, orally disintegrating, taste-masked tablet. These drug-delivery technologies are applicable to a wide range of molecules, and can, in many areas, address the pharmaceutical industry’s more complex drug-delivery challenges.

 

As a result, to prioritize those products with the highest market potential, the Company employs a market-driven selection process for its drug-development pipeline candidates. The first step is to identify disease states and medical disorders for which there are unmet medical needs, or in which therapeutic gaps exist in the treatment of those conditions. The next step is to review the currently available treatment options, and assess the feasibility of using the Company’s drug-delivery technologies to develop a product that improves upon those options, potentially providing clinically meaningful benefits to patients. Product candidates that meet these rigorous screening criteria are then considered for addition to Biovail’s development pipeline.

 

To this end, Biovail focuses its research-and-development activities on three core segments – enhanced formulations of existing products; combination products incorporating different classes of drugs; and difficult-to-manufacture generic pharmaceuticals.

 

2



 

 

Vision

 

Biovail aspires to be the world’s premier specialty pharmaceutical company.

 

Mission

 

Biovail is a specialty pharmaceutical company that applies advanced drug-delivery technologies to improve the clinical effectiveness of medicines. Biovail drives business growth by commercializing these products both directly and through partners.

 

3



 

DRUG-DELIVERY TECHNOLOGIES

 

Biovail regards its drug-delivery technologies as a key differentiator and core competency given its past success with the development, large-scale manufacture and commercialization of a number of products such as Wellbutrin XL®, Tiazac®, Tiazac® XC, Cardizem® LA and, Ultram® ER.

 

Biovail has numerous and complementary drug-delivery technologies that have enabled it to overcome significant product-development challenges. These technologies have in the past provided enhancements to existing compounds that have included reducing the number of doses a patient must take per day (once-daily dosing versus multiple doses per day), a reduction in potentially adverse side-effects and/or less variability of a drug in a patient’s bloodstream over the course of 24 hours. Once-daily dosing has been shown to provide higher levels of patient compliance due to a simplified dosage schedule, compared with medications that must be dosed multiple times per day. Beyond these benefits, the primary objective of the Company’s R&D efforts is to develop products with clinically meaningful benefits over existing treatment options.

 

INTELLECTUAL PROPERTY

 

As with all pharmaceutical companies, a key success factor for Biovail is the strength of its intellectual-property portfolio. Biovail Laboratories International SRL (BLS), which is located in St. Michael, Barbados, West Indies, directs and controls business development and research-and-development activities, and owns, manages and controls the Company’s intellectual-property portfolio, and controls the manufacturing of its products.

 

BIOVAIL PHARMACEUTICALS, INC.

 

In the United States, Biovail’s wholly owned subsidiary, Biovail Pharmaceuticals, Inc. (BPI), distributes a number of pharmaceutical products. Through most of 2006, BPI employed an 85-member specialty sales force that promoted certain products primarily to women’s health-care practitioners and dermatologists. However, in December 2006, the Company announced that it would leverage strategic partners to promote its products to specialist physicians in the U.S., which is consistent with its approach to commercializing products in the U.S. primary-care market since May 2005. As a result, the BPI specialty sales force and related support functions were eliminated. Following this decision, BPI ceased its co-promotional efforts for Ultram® ER and Zoladex® 3.6mg, and on December 20, 2006, entered into an exclusive promotional services agreement with Sciele Pharma, Inc. whereby Sciele’s sales force now promotes Biovail’s topical antiviral line, Zovirax® Ointment and Zovirax® Cream, to U.S. physicians.

 

In May 2005, Biovail had similarly realigned its U.S. sales and marketing operations, changing the manner in which its products were commercialized to the primary-care segment of the U.S. market. Following this realignment, the Company ceased direct promotion of its products to a broad audience of primary-care physicians in the U.S., and entered into a multi-faceted transaction with Kos Pharmaceuticals, Inc. (Kos) with respect to certain products being promoted to the primary-care market. Under the agreements with Kos, Biovail manufactures, supplies and sells Cardizem® LA to Kos for distribution at contractually determined prices, which exceed 30% of Kos’ net selling price. Biovail also divested all of its rights to Teveten® and Teveten® HCT to Kos.

 

BPI also distributes a number of branded off-patent products. These products — which Biovail refers to as its “Legacy products” — include the well-known brands Cardizem® CD, Ativan®, Vaseretic®, Vasotec®, Isordil® and Tiazac®. These products are not actively promoted by Biovail and represent assets for which patent protection has expired. While the products remain well respected by the medical community, their prescription volumes and/ or sales are in decline due to the availability of competing generic formulations.

 

4



 

In November 2005, Biovail announced its intention to pursue a spin-off of substantially all these Legacy products to shareholders. However, following further analysis of the opportunity, and faced with the prospect of a sooner-than-anticipated launch of a generic formulation of Wellbutrin XL®, in 2006, the Company decided that it would retain these assets. The profitability and cash flows associated with these products will be reinvested in strategic growth initiatives and other purposes.

 

BIOVAIL PHARMACEUTICALS CANADA

 

In Canada, where the market dynamics are much different than in the U.S., the Company has maintained a direct-selling commercial presence through Biovail Pharmaceuticals Canada (BPC), which successfully targets both specialist and primary-care physicians. BPC has established itself as a leading pharmaceutical marketing and sales operation in the Canadian market. Market research indicates that BPC is the largest independent pharmaceutical company that markets medicines to physicians in Canada.

 

In 2006, BPC expanded its sales force to 96 sales representatives, in anticipation of new product launches. BPC currently promotes a well-respected portfolio of products to approximately 11,000 physicians across the country. Products include Tiazac® XC, Wellbutrin® XL, and Glumetza™. BPC also promotes the Lescol® franchise, pursuant to an agreement entered into with Novartis Pharmaceuticals Canada, Inc. in May 2006. In addition, the Company is evaluating a number of product marketing and acquisition opportunities that have a strategic fit and offer potential for further growth with BPC’s commercial operations.

 

CONTRACT RESEARCH DIVISION

 

Biovail’s Contract Research Division (CRD) provides Biovail and other pharmaceutical companies with a broad range of Phase I and Phase II clinical research services. These involve principally conducting pharmacokinetic studies and bioanalytical laboratory testing to establish a drug’s bioavailability or its bioequivalence to another drug moiety. Clinical studies are reviewed by an independent Research Ethics Board, which assures that all studies are conducted in an ethical and safe manner, without compromising the health of the human subjects participating in them. As well, all clinical studies are approved by Health Canada under a Clinical Trial Application and executed under Good Laboratory Practices (GLP) and Good Clinical Practices (GCP).

 

Operating as an independent division in Toronto, Ontario, the CRD is located in a 41,000-square-foot, stand-alone facility owned by Biovail, and a 10,500-square-foot leased facility. These facilities include a 200-bed capacity clinic (five study clinics and a 12-bed Phase I first-in-man unit), a Medical Recruiting and Subject Screening Unit, a fully equipped Bioanalytical Laboratory, and a Department of Biopharmaceutics.

 

To date, the CRD has designed and conducted in excess of 3,000 bioavailability, bioequivalence and/or drug-interaction studies. The therapeutic areas in which the studies have been completed include cardiovascular disease; cardiopulmonary; bone and joint disease; pain management; infectious diseases; CNS; gastroenterology; and endocrinology. In addition, the CRD has performed Phase I first-in-man studies to establish the safety of new chemical entities.

 

The CRD maintains a database in excess of 85,000 adult male and female volunteers for potential study enrolment as well as an inventory of patient and specialty populations, including post-menopausal, renal-impaired and diabetic patients. The Bioanalytical Laboratory continues to add to its inventory of over 150 developed and validated assays. The CRD has its own independent Quality Assurance Department to assure that the operations of the CRD are subject to full compliance with the rules and regulations of the U.S. Food and Drug Administration (FDA), Canadian Therapeutic Products Directorate (TPD) and other comparable foreign regulatory bodies.

 

5



 

WORLD-CLASS MANUFACTURING

 

Biovail currently operates three pharmaceutical manufacturing facilities located in Steinbach, Manitoba; Dorado, Puerto Rico; and Carolina, Puerto Rico. All these facilities meet United States Food and Drug Administration (FDA) – mandated and Canadian Therapeutic Products Directorate (TPD) – mandated Good Manufacturing Practices (GMP).

 

At these facilities, the Company manufactures branded products that are commercialized by Biovail’s partners, including Wellbutrin XL®, Ultram® ER and Cardizem® LA; and several branded products that are distributed by BPI and BPC. Biovail also manufactures a portfolio of generic products that are distributed by Teva and Forest in the United States and by Novopharm Limited, a subsidiary of Teva, in Canada.

 

The Company maintains quality control and experienced manufacturing supervision at each site so that manufacturing, packaging and shipping activities comply with GMP requirements.

 

Raw materials for Biovail’s manufacturing operations are sourced from various FDA-approved companies worldwide. The Company strives to have a minimum of two suppliers for all major active pharmaceutical ingredients for its manufactured products. This facilitates both the continuity of supply of raw materials and best pricing from suppliers based on volume and time period.

 

 

 

6



 

 

7



 

CHAIRMAN’S LETTER TO SHAREHOLDERS

 

 

Eugene N. Melnyk

 

 

 

Chairman of the Board

 

 

Dear Fellow Shareholders:

 

IN RECENT YEARS, THE BOARDS OF DIRECTORS OF PUBLICLY TRADED COMPANIES HAVE TAKEN ON  INCREASING AMOUNTS OF RESPONSIBILITY FOR THE DIRECTION AND SUCCESS OF THE ENTITIES  THEY SERVE. NOT ONLY MUST THEY FOCUS ON HELPING TO SECURE THE RIGHT LEADERSHIP TO  MANAGE THEIR RESPECTIVE COMPANIES, THEY HAVE TO BE SUPPORTIVE OF THAT MANAGEMENT  TEAM, AND PROVIDE THEM WITH THE TOOLS THAT THEY NEED TO EXECUTE THEIR MANDATE.

 

8



 

Biovail Corporation is no exception. In what has become an increasingly strict regulatory environment for publicly held companies in many industry sectors, all aspects of an organization and its decision-making practices – from policies upon which the business and its supporting functions are run, to openness and transparency in its financial reporting, to the standards and practices and codes of ethics that govern the behaviors of its people – are under scrutiny from multiple groups of external stakeholders.

 

In June 2004, I initiated an ambitious corporate-governance enhancement program. The enhancements we have made over the past two years have been extensive and are ongoing. Although the Sarbanes-Oxley Act of 2002 has had a significant influence on the breadth, depth and scope of some of these changes, new legislation hasn’t changed our perspective. Many of these changes have been motivated by our desire to do the right thing – to set the bar high and to look for ways to continue to raise it. And we can’t rest on our laurels: once good corporate governance is achieved, it needs to be maintained. The obligation to continue to raise the bar becomes even more prevalent.

 

And rightly so.

 

Currently, there is a steadily growing trend toward ensuring that there is adequate separation between boards of directors and the executive management team charged with the day-to-day operations of a company. In June 2006, I relinquished the title of Executive Chairman to serve as Chairman of the Board, a move that fulfilled my stated intention to reduce my interaction with management.

 

9



 

At Biovail, one of the more important lessons that we have learned is that one process does not fit all. The changes that we have made to our policies and procedures at Biovail – both from operational and governance perspectives – have been driven, and will continue to be driven to a large degree, by the current status of our evolution as a company.

 

The dynamic nature of the pharmaceutical industry presents Biovail with multiple challenges and opportunities. For companies to realize their goals and objectives, they need people with strong values and integrity. As Biovail continues its quest to become one of the world’s premier specialty pharmaceutical companies, every employee, officer and director needs to understand the Company’s Vision, Mission and Core Values upon which our strategies for growth have been built. To this end, they must also understand the standards, policies and behaviors by which we must abide as we endeavor to achieve them.

 

Throughout 2006, Biovail delivered an expanded Code of Employee Governance to all of its people. Our code is comprised of three key items – our Standards of Business Conduct, our Disclosure Policy and our Employee Report Line.

 

Our Standards of Business Conduct clearly and concisely articulate the expectations and parameters that govern the conduct of all Biovail employees. It also covers subjects such as ethical practices, competitive practices, conflict of interest, and the overriding commitment to uphold standards of excellence, honesty and integrity.

 

Let me reiterate that we believe that merely meeting the requirements is not enough. More to the point, we are fully committed to not only meeting expectations but, wherever possible, making a concerted effort to exceed them.

 

10



Biovail’s Board of Directors understands that its role is centered on setting direction and working closely with the Company’s executives to develop business strategies. The execution of those business strategies is the domain and mandate of the executive management team.

 

The strength of Biovail’s business model was further evidenced in 2006 by the Company’s ability to reach its financial and operational objectives in the face of profound change. While 2007 will represent a transition year for Biovail, the Company’s future is indeed bright largely due to the individual and collective efforts of all Biovail’s people – their ongoing dedication and commitment to excellence and to drive long-term growth is reflected in the Company’s many successes.

 

On behalf of Biovail’s Board of Directors, its management team and our many employees, I would like to thank you, our shareholders, for your confidence and your continued support.

 

 

 

 

 

 

Eugene N. Melnyk

 

Chairman of the Board

 

11



 

CEO’S LETTER TO SHAREHOLDERS

 

 

Douglas J.P. Squires

 

 

 

Chief Executive Officer

 

 

Dear Fellow Shareholders:

 

IN 2006, BIOVAIL EXECUTED AGAINST ITS STATED FINANCIAL AND OPERATIONAL OBJECTIVES AS THE COMPANY GENERATED RECORD REVENUES AND ROBUST CASH FLOW FROM OPERATIONS. OVERALL, OUR PRODUCTS PERFORMED VERY WELL, ENABLING THE COMPANY TO SURPASS THE $1-BILLION MARK IN ANNUAL REVENUES FOR THE FIRST TIME IN ITS HISTORY. OUR STRONG FINANCIAL RESULTS ALLOWED US TO END THE YEAR WITH MORE THAN $830 MILLION IN CASH, WHICH HAS PROVIDED US WITH THE RESOURCES TO PURSUE A NUMBER OF STRATEGIC INITIATIVES, INCLUDING THE PLANNED APRIL 2007 ELIMINATION OF ALL LONG-TERM DEBT. AND THOSE RESULTS MADE IT POSSIBLE FOR US TO PAY $80 MILLION IN DIVIDENDS TO OUR SHAREHOLDERS IN 2006, AND INTRODUCE A NEW DIVIDEND POLICY COMMENCING IN 2007 THAT CONTEMPLATES TRIPLING THE PAYMENT OF AN ANNUAL DIVIDEND TO $1.50 PER COMMON SHARE.

 

12



 

Clearly, the past year presented Biovail with many challenges – most notably the loss of market exclusivity for the 300mg strength of Wellbutrin XL® in the United States. Although this development was disappointing, every company in the pharmaceutical industry – and virtually every product that those companies produce – will, at some point, face competition from generic products. And Biovail is no exception.

 

In March 2007, Biovail entered into comprehensive legal settlements related to Wellbutrin XL® with Anchen Pharmaceuticals LLP, Impax Laboratories, Inc., Watson Pharmaceuticals, Inc. and Teva Pharmaceutical Industries Ltd. The settlements include, among other things, the dismissal of Biovail’s patent-infringement actions against each of Impax and Watson related to their abbreviated new drug applications for generic formulations of Wellbutrin XL®. Under the terms of the agreement, with defined exceptions, none of Teva, Anchen, Impax and Watson may market a generic version of the 150mg strength of Wellbutrin XL® until 2008. The resolution of these legal actions – which allow for the entry of generic competition before the expiration of Biovail’s patents – eliminates costs and the uncertainty associated with any litigation, and will have a positive impact on Biovail’s financial performance in 2007.

 

FOCUS ON RESEARCH & DEVELOPMENT

 

In the face of these developments, Biovail’s business model remains sound, and continues to generate strong cash flows, which we will deploy in pursuit of our growth objectives, while we provide an attractive dividend to our shareholders. We will invest significantly in research and development (R&D), which we continue to view as the lifeblood of the Company. To this end, we are targeting an investment in R&D of up to $500 million through 2010.

 

Following a comprehensive review of all aspects of the Company’s business, in December 2006, Biovail announced that it would no longer maintain a sales organization in the United States and that it intends to enter into supply-and-distribution agreements with strategic partners to target physicians groups in the U.S. This approach is consistent with the strategy we announced in May 2005 to engage strategic partners to commercialize products to primary-care physicians (general practitioners). This “back-to-basics” approach provides significant cost savings and operational efficiencies; furthermore, it is consistent with our heritage, and is what has made Biovail so successful over the past decade – the development and large-scale manufacture of pharmaceutical products that incorporate our drug-delivery technologies.

 

13



 

Further to this revised commercialization strategy in the U.S., in late December, Biovail entered into a five-year, exclusive promotional services agreement with Sciele Pharma, Inc., whereby Sciele’s sales force now promotes our antiviral product line, Zovirax® Ointment and Zovirax® Cream, to U.S. physicians. Since Biovail acquired these products in 2001, prescription volume has increased by 26%.

 

These changes to our U.S. commercialization strategy did not impact Biovail Pharmaceuticals Canada (BPC), which marked its 10th anniversary in 2006. The relative size of the Canadian pharmaceutical market, which differs vastly from the U.S., makes it more feasible for Biovail to maintain a direct sales force that effectively targets both specialists and high-prescribing primary-care physicians. To this end, in April 2006, BPC’s 96-member sales force launched Wellbutrin® XL to physicians across Canada. In addition, our business development team is actively seeking to identify new product opportunities to add to BPC’s portfolio.

 

RECORD FINANCIAL RESULTS

 

Total revenues for the year ended December 31, 2006, were $1.07 billion, compared with $935.5 million for the full year 2005, an increase of 14%.

 

In 2006, Biovail’s U.S. GAAP net income declined 14% to $203.9 million, compared with $236.2 million for 2005. Fully diluted GAAP earnings per share (EPS) for 2006 were $1.27 versus $1.48 in 2005. However, net income in 2006 was negatively impacted by a number of items, including a $147.0-million non-cash write-down of intangible assets; a $54.8-million charge related to contract-loss provisions in our agreements with GlaxoSmithKline plc (GSK) for Wellbutrin XL® and with Kos Pharmaceuticals, Inc. (Kos) for Cardizem® LA; a $15.1-million charge related to the December 2006 restructuring of the Company’s U.S. commercial operations; $14.4 million in litigation-settlement costs related to the Wellbutrin XL® patent-infringement actions; and the Company’s licensing in 1999 of Adalat CC products from Elan Pharmaceuticals, plc (Elan). These were partially offset by a $4.0-million gain related to the termination of our agreement with Athpharma. Excluding these items, net income was $432.9 million in 2006, compared with similarly adjusted net income of $296.9 million in 2005, an increase of 46%.

 

14



 

Product sales for the full year 2006 were a record $1.02 billion, compared with $884.3 million in 2005, an increase of 16%. The solid performance of Biovail’s product portfolio in 2006 was primarily driven by Wellbutrin XL®, Ultram® ER and the Zovirax® franchise, and partially offset by declines in BPC revenues.

 

Wellbutrin XL® again performed above expectations, generating revenues of $450.3 million in 2006, compared with $354.2 million for 2005. This can be attributed to strong prescription growth, combined with price increases implemented by marketing partner GSK.

 

In late February 2006, Biovail and marketing partner, Ortho-McNeil, Inc. (OMI), a division of Johnson & Johnson, launched Ultram® ER, the first once-daily formulation of tramadol to be approved in the U.S. for the treatment of moderate to moderately severe chronic pain in adults. In 2006, Ultram® ER generated $53.7 million in revenues for Biovail. In the last several months, OMI has undertaken a number of initiatives in an attempt to accelerate prescription growth for Ultram® ER, including an unbranded direct-to-consumer (DTC) advertising campaign, a discount-card program and an increase to 30 tablets (from seven) in the size of samples to allow patients to be optimally titrated to higher dosage strengths. We are monitoring the impact of these initiatives.

 

Revenues for Biovail’s Zovirax® franchise were $112.4 million in 2006, an increase of 17%, compared with the $95.9 million in 2005. In the fourth quarter of 2006, Zovirax® Ointment and Zovirax® Cream held a combined 71.4% share of the topical herpes market, an increase of 4.6 percentage points in market share, compared with the corresponding period for the previous year.

 

In 2006, BPC generated revenues of $68.7 million, compared with $99.5 million in the full year of 2005. The performance of this division continued to be significantly impacted by the recent introduction of generic competition for Wellbutrin® SR and Tiazac®. Partially offsetting this decline is the continued growth of Tiazac® XC and Wellbutrin® XL. Total prescription volume for Tiazac® XC, which was launched in January 2005, increased 181% in 2006. Launched in April 2006, Wellbutrin® XL held a 21.6% share of the bupropion market (including generics), in the fourth quarter of 2006.

 

15



 

Cardizem® LA generated revenues of $59.3 million in 2006, compared with $59.7 million in the full year of 2005. Biovail manufactures and supplies Cardizem® LA to Kos at contractually determined prices that are in excess of 30% of their net selling prices. The decrease primarily reflects manufacturing issues that resulted in market shortages of the lower-strength (120mg and 180mg) tablets, partially offset by price increases taken by Kos. Biovail has now returned to full production of these strengths.

 

REGULATORY, PRODUCT-DEVELOPMENT MILESTONES

 

The positive momentum generated in 2005 when the Company received an unprecedented five product approvals and one tentative product approval in the U.S. and Canada carried over into the early part of 2006 as Biovail received approval from the Therapeutic Products Directorate (TPD) for Wellbutrin® XL in Canada.

 

In 2006, our marketing partner, GSK submitted applications to a number of European countries for Wellbutrin XL®. In January 2007, GSK announced that The Netherlands was the first European country to approve the product, which will be most commonly marketed as Wellbutrin XR®. GSK anticipates that the regulatory agencies in various other European countries will grant national licenses throughout 2007, and that the medicine could begin to be available to patients starting in April 2007. Pursuant to the agreement signed in 2001 between Biovail and GSK, Biovail will manufacture and supply the product to GSK at a fixed, contractually determined price.

 

In November 2006, Biovail’s New Drug Submission (NDS) to the Therapeutic Products Directorate (Canada) for BVF-127, a once-daily extended-release tramadol for the management of moderate to moderately severe chronic pain in adults, was accepted for review.

 

Development efforts continued for a number of high-priority programs, including BVF-033, a new salt formulation of bupropion that we believe may provide unique safety benefits. In September 2006, we submitted a New Drug Application (NDA) for this product to the FDA. The action date for the NDA is July 28, 2007.

 

The key to success in the pharmaceutical industry is a robust development pipeline. To this end, Biovail recently completed a comprehensive review of its pipeline, and

 

16



 

is focusing its R&D efforts on a number of core programs, several of which remain undisclosed, for competitive reasons. There are three key focus areas for Biovail’s pipeline activities – the development of enhanced formulations of existing drugs; the development of combination products that incorporate different classes of drugs; and difficult-to-manufacture generic products, where competition is more limited, and consequently, commercial pricing and gross margins potentially higher.

 

Products under development include BVF-146, a combination product that incorporates Biovail’s once-daily tramadol formulation with an undisclosed non-steroidal anti-inflammatory drug, or NSAID, and for which Phase III studies were initiated in October 2006; BVF-045, a combination product comprised of Biovail’s bupropion salt with another undisclosed anti-depressant agent; and BVF-012, an enhanced absorption, alcohol-resistant formulation of venlafaxine.

 

Additionally, further to an agreement with France-based Ethypharm S.A., we’re developing four products – BVF-087 and BVF-065, which target large markets in central nervous system disorders; BVF-239, a cardiovascular product; and BVF-300, a product that targets the gastrointestinal-disease market. These products have aggregate annual revenues, according to IMS, of over $9 billion. And in February 2007, we reached an agreement with Depomed, Inc. that provides Biovail with access to Depomed’s proprietary AcuForm™ drug-delivery technology for the development of up to two undisclosed products.

 

We have now completed the previously announced expansion and optimization of our manufacturing facility in Steinbach, Manitoba. This expansion enables the Company to better meet current and anticipated demand for its portfolio of products. The project, the third such expansion of Steinbach in the past five years, resulted in the addition of approximately 65,000 square feet to the facility.

 

THE ROAD AHEAD

 

Let me reiterate that Biovail is on solid financial and operational footings. The Company’s record level of operating cash flows in 2006 (over $520 million) has further solidified its financial position, and has provided Biovail with the resources to pursue a number

 

17



 

of strategies to take us through the next phases of our evolution. These cash flows have also provided us with the resources to continue to build the Company through a focused investment in R&D, and to return value to our shareholders in the form of dividends.

 

Although 2006 was a year of great accomplishment, much work remains to be done. Make no mistake: Biovail’s Board of Directors, its management team and employees are determined to continue to succeed. The road to success is built on hard work. Our employees reiterate that commitment individually and collectively each and every day by embracing The Spirit of Biovail, and through the individual and collective actions we take toward the realization of these mission-critical objectives.

 

Without question, 2006 posed its share of challenges for Biovail. But I’m pleased to say that we responded strongly to each and every one of them. Going forward, we are grateful for the extraordinary opportunities that exist to build our business, and to enhance the quality of life for those who take the medicines we produce.

 

On behalf of Biovail’s executive team and our employees, I would like to take this opportunity to extend our thanks to our Board of Directors and shareholders for their continued support.

 

 

 

 

 

Douglas J.P. Squires

 

Chief Executive Officer

 

18


Wendy Kelley

Senior Vice-President,

General Counsel and

Corporate Secretary

 

 

“IN 2006, BIOVAIL CONTINUED TO STAY ATOP OF BEST PRACTICES IN CORPORATE GOVERNANCE. THE COMPANY REVIEWED, UPDATED AND ENHANCED ITS CODE OF EMPLOYEE GOVERNANCE, TO WHICH ALL EMPLOYEES WERE RECERTIFIED. THESE ACTIONS REFLECT ONE OF OUR KEY OBJECTIVES – TO CONTINUE TO STRENGTHEN OUR BUSINESS POLICIES AND PRACTICES IN SUPPORT OF A CULTURE WHICH ADVOCATES TRANSPARENCY AND ACCOUNTABILITY.”

 

19



 

Kenneth G. Howling

Senior Vice-President,

Chief Financial Officer

 

 

“2006 WAS A REMARKABLE YEAR FOR BIOVAIL. IN EXECUTING ITS BUSINESS PLAN, THE COMPANY SURPASSED $1-BILLION IN REVENUES FOR THE FIRST TIME, GENERATING RECORD CASH FLOW FROM OPERATIONS OF OVER $520 MILLION AND ENDING 2006 WITH OVER $830 MILLION IN CASH. OUR BUSINESS MODEL ALLOWS US TO PLAN FOR A SIGNIFICANT INCREASE IN FUTURE R&D SPENDING, ELIMINATE DEBT, AND SIGNIFICANTLY INCREASE OUR PLANNED DIVIDEND PAYMENTS TO SHAREHOLDERS. ALL OF US AT BIOVAIL REAFFIRM OUR COMMITMENT TO BECOMING ONE OF THE WORLD’S PREMIER SPECIALTY PHARMACEUTICAL COMPANIES WITH A PRIMARY GOAL OF MAXIMIZING SHAREHOLDER VALUE.”

 

20



 

2006 Highlights

 

RESTRUCTURING OF U.S. OPERATIONS

 

In 2006, as part of a comprehensive review of all aspects of its business, and in an effort to reduce operating costs and improve operating efficiencies, Biovail made the decision to leverage strategic partners to promote its products to specialist physicians in the United States. As a result, the Company decided that it would no longer maintain a U.S.-based sales organization. This restructuring has enhanced the operational efficiency of Biovail’s business model, and has laid the foundation for a more cost-effective way for the Company’s products to be commercialized in the U.S. market.

 

This approach – to enter into supply-and-distribution agreements with strategic partners – is consistent with the Company’s May 2005 decision to commercialize products in the U.S. primary-care market. It is also reflective of the fact that the existing infrastructure was under-utilized, and that product-acquisition opportunities, many of which were evaluated by the Company, did not meet Biovail’s financial criteria.

 

As a consequence of the restructuring, Biovail Pharmaceuticals, Inc.’s (BPI) specialty sales force and related support functions were eliminated. Accordingly, BPI ceased co-promotional efforts for Ultram® ER and Zoladex® 3.6mg. Ortho McNeil, Inc. now manages all promotional activity for Ultram® ER. With respect to Zovirax®, in late December, Biovail entered into an exclusive promotional services agreement with Sciele Pharma, Inc.

 

In addition, after a comprehensive analysis of each of Biovail’s corporate and functional areas, overhead and infrastructure costs were reduced to improve operating efficiencies. The cost-cutting measures resulted in a restructuring charge of $15.1 million (primarily related to severance costs) – the majority of which was booked in the fourth quarter of 2006.

 

SCIELE PARTNERSHIP

 

Under the terms of the agreement with Sciele Pharma, Inc., which has an initial term of five years, Sciele’s primary-care and women’s health sales forces now provide detail and sampling support for Zovirax® Ointment and Zovirax® Cream – promoting it to U.S. physicians. In addition, Sciele is entitled to incentive fees if certain baseline revenue targets are met.

 

Within the topical antiviral market, the Zovirax® line held a 71.4% share at the end of 2006. Since October 2001, the time at which Biovail acquired the topical formulations of Zovirax®, market share has increased by 26%.

 

ZOVIRAX® – MONTHLY SHARE OF TOPICAL ANTIVIRAL MARKET

 

 

Source:  National Prescription Audit Plus (IMS Health)

 

21



 

PAYMENT OF DIVIDENDS

 

Biovail’s strong cash balances and robust operating cash flows provided the Company with an opportunity to offer total dividends of $80 million to its shareholders throughout 2006 as per its dividend policy established in 2005.

 

On March 23, 2006, Biovail announced that the Company’s Board of Directors had declared a quarterly cash dividend of US$0.125 per share payable on April 28, 2006, to shareholders of record at the close of business on April 7, 2006.

 

On May 11, Biovail announced that the Company’s Board of Directors had declared a quarterly cash dividend of US$0.125 per share payable on May 31, to shareholders of record at the close of business on May 23.

 

On August 10, Biovail announced that the Company’s Board of Directors had declared a quarterly cash dividend of US$0.125 per share payable on September 1, to shareholders of record at the close of business on August 18.

 

On November 9, Biovail announced that the Company’s Board of Directors had declared a quarterly cash dividend of US$0.125 per share payable on November 30, to shareholders of record at the close of business on November 22.

 

Dividends declared by Biovail since it adopted a dividend policy in November 2005 are shown in the table below.

 

\

 

REVISED DIVIDEND POLICY

 

Given the December 2006 restructuring of the Company’s U.S. commercial operations and the decision to focus on driving business growth through a targeted investment in high-priority research-and-development programs, Biovail is no longer pursuing commercial-product acquisitions in the U.S. market.

 

As a result of this change of focus, the Company undertook a comprehensive analysis of its research-and-development spending requirements for the coming years. Given Biovail’s strong cash balances at the end of 2006, and the robust cash-flow generation of the Company’s business model, Biovail’s Board of Directors decided that there was likely to be significant excess cash on hand after funding the Company’s growth strategy over the foreseeable future.

 

Accordingly, in December 2006, the Company adopted a new dividend policy that contemplates the payment of an annual dividend of $1.50 per common share (paid quarterly in increments of $0.375 per common share subject to Board approval), a 200% increase relative to the former dividend policy. In addition, Biovail may approve the payment of future special dividends, subject to positive business trends and at the discretion of the Board. For example, as a result of the strong financial performance in 2006, the Company declared the payment of a special cash dividend of $0.50 per share, which was paid in January 2007.

 

The change in Biovail’s dividend policy is representative of management’s confidence in the sustainability of strong cash flows and the strength of the Company’s business model.

 

22



 

ELIMINATION OF DEBT

 

In 2006, Biovail announced its intention to eliminate its long-term debt, and in February 2007, called for the redemption of all outstanding 7 7/8% Senior Subordinated Notes due April 1, 2010. Upon the redemption, effective April 1, 2007, Biovail will be debt-free. As per the Notes’ indenture, the Company will be required to a pay a 1.969% premium for the early redemption of the Notes. From a cash earnings-per-share perspective in 2007, the redemption is expected to be neutral, as the significant savings in interest expense will be offset by the call premium and lower interest income on cash balances.

 

This fiscally prudent initiative will save Biovail over $31 million in annual interest payments – money that can be reinvested into the Company’s development pipeline or other growth initiatives. Biovail’s strong cash balances at the end of 2006 – over $830 million – in conjunction with the strong cash-generation power of its business model, allowed for the early redemption of the Notes, while not compromising the Company’s long-term growth strategy, nor the ability to provide its shareholders with an attractive dividend.

 

 

23



 

WELLBUTRIN XL®

(BUPROPION HYDROCHLORIDE)

 

 

24



 

Wellbutrin XL® was once again Biovail’s key growth driver, generating revenues of $450.3 million in 2006, a 27% increase relative to 2005. This performance reflects the product’s continued uptake in the U.S. antidepressant market, prior to the mid-December launch of a generic formulation of the 300mg strength of Wellbutrin XL®. Total prescriptions for Wellbutrin XL® in 2006 increased 15% compared with the previous year.

 

In June 2006, Biovail marketing partner GSK announced that Wellbutrin XL® had received FDA approval for the treatment of seasonal affective disorder (SAD), a condition that affects about 6% of American adults. Wellbutrin XL® is the first and only medication approved by the FDA to prevent seasonal major depressive episodes.

 

Wellbutrin® XL strengthened its position in the Canadian anti-depressant market throughout 2006. Launched in April 2006 by the BPC sales force, Wellbutrin® XL managed to capture just over 11% of total bupropion prescriptions in Canada in 2006; in December 2006, that figure was approximately 24%. This strong performance partially offset the impact of the introduction of generic competition for Wellbutrin SR® in 2005.

 

In terms of seeking opportunities in new markets, in February 2006, Biovail marketing partner GSK announced that it had submitted an application for the regulatory approval of Wellbutrin XL® in several European markets. In January 2007, GSK announced that The Netherlands was the first European country to approve the product, which will be most commonly marketed as Wellbutrin XR®. GSK anticipates that the regulatory agencies in various other European countries will grant national licenses throughout 2007, and that the medicine could begin to be available to patients starting in April 2007. Pursuant to the agreement signed in 2001 between Biovail and GSK, Biovail will manufacture and supply the product to GSK at a fixed, contractually determined price.

 

25



 

ULTRAM® ER (TRAMADOL HYDROCHLORIDE)

 

 

In November 2005, Biovail entered into a 10-year supply agreement with marketing partner Ortho-McNeil, Inc. (OMI), a Johnson & Johnson company, for the distribution of Biovail’s extended-release formulation of tramadol, which has been branded Ultram® ER. Pursuant to that agreement, Biovail manufactures and supplies the product to OMI for distribution in the United States and Puerto Rico at contractually determined supply prices that range from 27.5% to 37.5% of OMI’s net selling price for Ultram® ER, depending on the year of sale. The supply price was at the lowest end of the range in 2006, and will be at the highest end of the range in each of 2007 and 2008.

 

26



 

Ultram® ER, which was approved by the FDA in September 2005, is the first once-daily tramadol product available in the United States for the treatment of moderate to moderately severe chronic pain in adults. Available in 100mg, 200mg and 300mg dosage strengths, Ultram® ER was launched to U.S. physicians in February 2006, and has made steady progress in the U.S. pain market. Net revenues for the product in 2006 were $53.7 million, which includes a $7.8-million negative impact associated with costs related to a voluntary recall of certain tablet strengths in June 2006.

 

Biovail and OMI believe that Ultram® ER is well positioned on the pain ladder between non-steroidal anti-inflammatory drugs, or NSAIDs, and more potent products, such as hydrocodone.

 

Biovail and OMI are optimistic and confident that a significant market opportunity exists for Ultram® ER. When compared with several highly successful chronic-pain product launches, Ultram® ER performed well in its first 12 months on the market, as demonstrated in the chart below.

 

CHRONIC PAIN MEDICATIONS – LAUNCH COMPARISON

 

 

Source:  The National Prescription Audit Plus, IMS Health

 

27



 

Regulatory, R&D Successes

 

In 2006, several of Biovail’s products made critical strides on the regulatory and research-and-development fronts. These developments have set the stage for a number of exciting possibilities in 2007 and beyond.

 

January

 

The Therapeutic Products Directorate (TPD), Canada’s regulatory agency for pharmaceuticals, issues a Notice of Compliance for Biovail’s New Drug Submission (NDS) for the 150mg and 300mg tablet strengths of Wellbutrin® XL for the treatment of major depressive illness in adults. The TPD completes its review six months ahead of schedule. In 2006, the Canadian anti-depressant market was valued at approximately C$900 million.

 

February

 

Biovail’s marketing partner, GlaxoSmithKline plc (GSK), files for regulatory approval of Wellbutrin XR® in several key European markets, including Germany, Italy and Spain.

 

The application is the first for a once-daily noradrenaline dopamine reuptake inhibitor (NDRI) for the treatment of depression in Europe.

 

April

 

Biovail officially launches Wellbutrin® XL – the first once-daily extended-release formulation of bupropion hydrochloride for the treatment of depression in adults – to the Canadian market.

 

Wellbutrin® XL is marketed and distributed by Biovail Pharmaceuticals Canada (BPC), the Canadian sales and marketing division of Biovail Corporation.

 

June

 

GSK announces that it has received approval from the U.S. Food and Drug Administration (FDA) for Wellbutrin XL® for the prevention of seasonal major depressive episodes in patients with a diagnosis of seasonal affective disorder (SAD), a condition affecting about 6% of American adults. Wellbutrin XL® is the first and only medication approved to prevent seasonal major depressive episodes.

 

September

 

Biovail submits its New Drug Application (NDA) to the FDA for BVF-033 – a novel bupropion salt. Biovail believes that BVF-033 may offer a superior safety profile to bupropion hydrochloride, the active ingredient in Wellbutrin® XL. BVF-033 is also resistant to interactions with alcohol. The FDA action date is July 28, 2007.

 

Biovail’s bupropion salt formulation is also being used as the platform for a bupropion combination product, BVF-045, which combines two anti-depressant drugs that target different neural pathways important in depression. The Company believes that BVF-045 may provide physicians a novel treatment option that may be particularly effective in the treatment of this prevalent disease.

 


 

Biovail submits an NDS to the TPD for BVF-127, a once-daily extended-release tramadol formulation for the treatment of moderate to moderately severe chronic pain in adults. The size of the Canadian pain market in 2006 was valued at over C$1 billion.

 

October

 

Biovail initiates the Phase III clinical program for BVF-146, a combination product consisting of the Company’s once-daily tramadol formulation with an undisclosed non-steroidal anti-inflammatory drug, or NSAID. The Company believes that BVF-146 may provide physicians with a single-tablet option that incorporates two separate classes of drugs – a centrally acting analgesic, tramadol, with an anti-inflammatory agent – which may provide a synergistic approach to the management of pain and inflammation.

 

December

 

Biovail amends its April 2002 agreement with Ethypharm S.A. to include the development of four undisclosed products. Among these are BVF-087 and BVF-065, which target large markets in central nervous system disorders; BVF-239, a cardiovascular product; and BVF-300, a product targeting the gastrointestinal-disease market. In aggregate, these novel formulations target brands with annual U.S. sales in excess of $9 billion, according to IMS Health.

 

28



 

Dr. Peter Silverstone

Senior Vice-President,

Medical and Scientific Affairs

 

 

“THE DRUG-DELIVERY TECHNOLOGIES WHICH FUEL OUR PRODUCT PIPELINE ARE

BIOVAIL’S KEY COMPETITIVE DIFFERENTIATORS AND ARE OUR PLATFORM FOR

FUTURE GROWTH. OUR STRATEGY TO TAKE THOSE PROPRIETARY TECHNOLOGIES

AND AGGRESSIVELY PURSUE WAYS TO ENHANCE FORMULATIONS OF EXISTING

DRUGS EXTENDS THEIR EXCLUSIVITY THROUGH THE STAGED INTRODUCTION OF

PRODUCT ENHANCEMENTS. THIS ENABLES US TO DEVELOP NEXT-GENERATION

MEDICINES THAT PROVIDE CLINICALLY MEANINGFUL BENEFITS; POTENTIALLY

MAKING IMPROVEMENTS TO THE LIVES OF THE PATIENTS WHO USE THEM.”

 

29



 

The Power of

10

 

2006 was not only significant from a financial perspective: it also marked the 10-year anniversary for a number of significant events in Biovail’s history.

 

TIAZAC’S 10-YEAR ANNIVERSARY

 

2006 marked the 10th anniversary of the U.S. launch of Tiazac®, a once-daily formulation of diltiazem developed by Biovail indicated for the treatment of hypertension and angina. Tiazac® was launched by Forest Laboratories, Inc. (Forest) to physicians in the United States in February 1996.

 

The launch of Tiazac® was a watershed event in Biovail’s history, as it represented the first product that Biovail manufactured in commercial-scale quantities. Prior to Tiazac®, Biovail’s revenues were largely limited to single-digit royalties on a number of controlled-release products. Tiazac® marked the initiation of Biovail’s ascent into one of the world’s leading specialty pharmaceutical companies.

 

Through Forest’s focused promotional efforts, Tiazac® went on to capture a 21% share of the once-daily diltiazem market, and became Biovail’s largest product for several years. In 2002, Tiazac® generated U.S. revenues of over $80 million for Biovail.

 

However, as with virtually every pharmaceutical product, Tiazac® succumbed to generic competition in April 2003. Upon the introduction of the first generic formulation of Tiazac®, Forest ceased promotional support for the product and began to distribute a Tiazac® generic on our behalf. That distribution agreement continues today.

 

30



 

In Canada, Tiazac® was officially launched in May 1997 by Biovail’s Canadian sales and marketing division, then called Crystaal Pharmaceuticals. Tiazac®’s success in the Canadian market, as measured by its market share, would eventually surpass that of Tiazac®’s U.S. experience – a testament to the effort of the Company’s Canadian sales force.

 

In 2005, prior to the introduction of generic competition to Tiazac® in Canada, Biovail launched the next-generation formulation of the franchise, Tiazac® XC. The new formulation featured a new Diffusion Technology (DiTech™) delivery system designed for night-time administration, resulting in improved 24-hour blood-pressure (BP) control with additional BP control during the early-morning hours, when the incidence of adverse cardiac events is highest. In 2006, Tiazac® XC captured 26.5% of new prescriptions written for the Tiazac® brand (including generics), mitigating the effect of generic competition, which began in January 2006, to Tiazac®. Concurrently, Biovail launched its own generic formulation of Tiazac® through a distribution agreement with Novopharm Limited, a subsidiary of Teva Pharmaceutical Industries Ltd.

 

 

10 YEARS ON THE NYSE

 

On December 11, 2006, Biovail celebrated its 10th anniversary of listing on the New York Stock Exchange (NYSE), by ringing the Opening Bell at one of the world’s pre-eminent stock exchanges. This marks the second time that Biovail has been involved in a ceremonial stock exchange opening at the NYSE; the first time was the date of its initial listing on December 12, 1996.

 

To commemorate the occasion, Chairman Eugene Melnyk and Myrna Escandor, Biovail’s longest-serving employee, rang the Opening Bell at 9:30 a.m. EST to officially launch the day’s trading. Several members of Biovail’s management team, and the Company’s Board of Directors, were also in attendance.

 

Biovail was originally listed on the NASDAQ exchange in 1994, transferred to the American Stock Exchange that same year and then moved to the NYSE.

 

 

BPC’S 10TH ANNIVERSARY

 

In 2006, Biovail Pharmaceuticals Canada celebrated its first decade of existence. For 10 years, BPC (previously Crystaal Pharmaceuticals) has aggressively pursued new opportunities to market products that make a positive impact on the lives of Canadians.

 

With a proven-track record, which includes an impressive list of high-performing pharmaceuticals, including Tiazac®, Tiazac® XC, Celexa, Wellbutrin SR®, Wellbutrin® XL, Monocor® and Retavase®, BPC was, and continues to be, a key player in the Canadian pharmaceuticals market.

 

To commemorate the special occasion, on April 10, 2006, more than 200 Biovail employees attended a celebration at The Carlu – a historic venue in downtown Toronto. The event paid homage to the past, but also drew attention to the future, recognizing that BPC’s accomplished history gives it a solid platform upon which to launch the next phases of its growth. To this end, Biovail is actively pursuing a number of potential product-acquisition opportunities for the Canadian market.

 

31



 

Gilbert Godin

Senior Vice-President,

Technical Operations

and Drug Delivery

 

 

“THROUGHOUT THE PAST 10 YEARS – A TESTAMENT TO ITS R&D FORTITUDE – BIOVAIL HAS BROUGHT OVER 15 PHARMACEUTICAL PRODUCTS TO THE U.S. AND CANADIAN MARKETPLACES, AND HAS GENERATED APPROXIMATELY $5 BILLION IN PRODUCT REVENUES. WITH OUTSTANDING SCIENTIFIC PERSONNEL ACROSS OUR LOCATIONS, BIOVAIL CONTINUES TO LEVERAGE ITS STATE-OF-THE-ART DRUG-DELIVERY TECHNOLOGIES TO DEVELOP HIGH-VALUE ENHANCEMENTS AND MODIFICATIONS TO NEW AND EXISTING MOLECULES FOR NEAR AND LONGTERM GROWTH.”

 

32



 

Research and

Development Strategy

 

IN LATE 2006, BIOVAIL AFFIRMED ITS COMMITMENT TO DRIVE BUSINESS GROWTH THROUGH A RENEWED FOCUS ON RESEARCH AND DEVELOPMENT. CONSISTENT WITH ITS HERITAGE, THIS ‘BACK-TO-BASICS’ APPROACH PLACES AN INCREASED EMPHASIS ON THE COMPANY’S CORE COMPETENCY – THE DEVELOPMENT AND LARGE-SCALE MANUFACTURE OF NOVEL MEDICINES THAT EMPLOY THE COMPANY’S DRUG-DELIVERY TECHNOLOGIES – AND A FOCUS ON COST COMPETITIVENESS IN AN EFFORT TO MAXIMIZE SHAREHOLDER VALUE.

 

TO THIS END, THE COMPANY ANNOUNCED THAT IT WOULD DRIVE BUSINESS GROWTH THROUGH A TARGETED FOCUS ON A NUMBER OF CORE RESEARCH-AND-DEVELOPMENT PROGRAMS. THE COMPANY DECLARED ITS INTENTION TO SIGNIFICANTLY INCREASE ITS INVESTMENT IN RESEARCH AND DEVELOPMENT, AND EXPECTS TO SPEND $500 MILLION ON R&D THROUGH 2010, AN INCREASE OF APPROXIMATELY 50% OVER THE PREVIOUS FOUR YEARS.

 

THE COMPANY WILL FOCUS ITS EFFORTS ON THREE CORE SEGMENTS: (1) ENHANCED FORMULATIONS OF EXISTING DRUGS THAT CONFER MEANINGFUL THERAPEUTIC BENEFITS TO PATIENTS; (2) COMBINATION PRODUCTS THAT INCORPORATE TWO OR MORE DIFFERENT THERAPEUTIC CLASSES OF DRUGS; AND (3) DIFFICULT-TO-MANUFACTURE GENERIC PHARMACEUTICALS.

 

MANY LARGE PHARMACEUTICAL COMPANIES PURSUE LINE-EXTENSION STRATEGIES TO EXPAND UPON THE SIGNIFICANT CLINICAL AND MARKETING INVESTMENTS THEY HAVE MADE IN ESTABLISHING HIGH-VALUE BRANDS. COMBINATION THERAPY IS ALSO GAINING IN PROMINENCE WITHIN THE MEDICAL COMMUNITY, AS PHYSICIANS SEEK TO CAPITALIZE ON THE SYNERGISTIC EFFECTS AND POTENTIAL SUPERIOR SIDE-EFFECT PROFILES. SUCH PRODUCTS ALSO PROVIDE AN OPPORTUNITY TO LESSEN THE ‘PILL BURDEN’ ON PATIENTS. WITH RESPECT TO GENERIC PHARMACEUTICALS, BIOVAIL FOCUSES, AND INTENDS TO CONTINUE TO FOCUS, ITS EFFORTS EXCLUSIVELY ON DIFFICULT-TO-MANUFACTURE PRODUCTS, WHERE COMPETITION IS MORE LIMITED, AND CONSEQUENTLY, COMMERCIAL PRICING AND GROSS MARGINS ARE POTENTIALLY HIGHER.

 

WITH RESPECT TO DISCLOSED PIPELINE PRODUCTS, BIOVAIL IS IN ACTIVE DISCUSSIONS WITH A NUMBER OF PHARMACEUTICAL COMPANIES FOR COMMERCIALIZATION RIGHTS. GIVEN THE INHERENT DEVELOPMENT RISK WITH ANY PHARMACEUTICAL PRODUCT, ENGAGING STRATEGIC PARTNERS EARLIER IN THE PRODUCT-DEVELOPMENT CYCLE MAY ALLOW PROGRAMS TO PROGRESS IN A MORE COST-EFFECTIVE MANNER, WHILE MAXIMIZING THE AVAILABLE NUMBER OF PIPELINE OPPORTUNITIES AND THEIR RESPECTIVE POTENTIAL FOR SUCCESS.

 

33



 

DRUG-DELIVERY TECHNOLOGIES

 

Biovail has numerous proprietary drug-delivery technologies that are used to develop controlled-release, enhanced/modified absorption and rapid-dissolve products. The Company also has access to technologies of its development partners through licensing agreements. These technologies enable Biovail to develop both branded and generic pharmaceutical products. The Company’s formulations for these products are either patented or proprietary. Accordingly, generic manufacturers may be inhibited from duplicating Biovail’s products or may have difficulty duplicating its formulations by other means.

 

Oral controlled-release technologies permit the development of specialized oral delivery systems that improve the absorption and utilization of drugs by the human body. Release patterns are characterized as either “zero order”, which indicates constant drug release over time, or “first order”, which indicates decreasing release over time. These systems offer a number of advantages, in particular, they allow the patient to take only one or two doses of the drug per day. This, combined with enhanced therapeutic effectiveness, reduced side effects, improved patient compliance and potential cost effectiveness, makes controlled-release drug products ideally suited for the treatment of chronic conditions.

 

Biovail’s controlled-release technologies can provide a broad range of release profiles, taking into account the physical and chemical characteristics of a drug product, the therapeutic use of the particular drug and the optimal site for release of the basic drug in the gastrointestinal tract (the “GI tract”). The objective is to provide a delivery system allowing for a single dose per 12-hour to 24-hour period, while assuring gradual and controlled-release of the subject drug at a suitable location(s) in the GI tract.

 

The Company’s rapid-dissolve (FlashDose®) formulations contain the same basic chemical compound found in the original branded products. The dry chemical compounds are encapsulated in microspheres utilizing Biovail’s CEFORM™ technology. The Company’s Shearform™ and other orally disintegrating tablet (ODT) technologies are used to produce matrices or excipient blends that are subsequently combined with the CEFORM™ microspheres. This final blend can be compressed into rapid-dissolve tablet formulations. The benefits of rapid-dissolve formulations include the ease of administration for the elderly, young children, or people who may have difficulty swallowing tablets or capsules.

 

Biovail’s Enhanced Absorption technology platform is unique in the sense that various formulation and physico-chemical tools can be applied alone or in combination to improve the absorption profile of a drug. As examples, it may be possible to increase the solubility, increase the amount absorbed, control the pre-systemic metabolism, and/or increase the rate of absorption, with or without modification of the total amount of drug into the bloodstream.

 

DIMATRIX

 

Dimatrix is a diffusion-controlled matrix technology for watersoluble drugs in the form of tablets. The drug compound is uniformly dispersed in a polymer matrix. The mechanism of release involves the swelling of polymers within the matrix, thus enabling the drug to be dissolved and released by diffusion through an unstirred boundary layer. The release pattern is characterized as first order as the rate of drug diffusion out of the swollen matrix is dependent upon the concentration gradient.

 

SMARTCOAT™

 

Smartcoat™ is a technology Biovail acquired from and developed with Pharma Pass. This technology allows the manufacturing of very high potency, controlled-release tablets, allowing for smaller sized tablets while controlling the release over a 24-hour period. The Smartcoat™ technology is also suitable for the development of combination products. A thin, very strong molecular diffusion membrane controls the release and this rate can be adapted to a zero-order or Weibull (“S-shaped”) function. In general, the Smartcoat™ technology is resistant to interactions with alcohol.

 

SMARTCOAT™ AQ

 

Smartcoat™ AQ is a water-based, proprietary version of the Smartcoat™ technology. To date, Biovail has successfully formulated a number of products utilizing this technology, including an aqueous-based formulation of metformin. The technology can also be adapted to provide alcohol-interaction resistance properties.

 

34



 

CHRONOTABS

 

Chronotabs are made of Multipart or Smartcoat™ tablets particularly adapted to chronotherapy (the science of treating diseases that follow the body’s circadian rhythms), using a second layer of smart polymers made of dry or filmcoating in order to optimize the active drug absorption profile for bedtime administration.

 

CONSURF

 

Consurf is a zero-order drug-delivery system for hydrophilic and hydrophobic drugs in the form of matrix tablets. The drug compound is uniformly dispersed in a matrix consisting of a unique blend of polymers. The mechanism of release involves the concurrent swelling and erosion of the matrix such that a constant surface matrix area is maintained during transit through the GI tract. This results in a zero-order release of the drug of interest.

 

SHEARFORM™

 

Shearform™ is used to produce matrices of saccharides, polysaccharides or other carrier materials that are subsequently processed into amorphous fibers or flakes and recrystallized to a predetermined level. This process is used to produce rapid dissolve formulations, including FlashDose®. Shearform™ can also be applied to food-product ingredients to provide enhanced flavoring. Other ODT technologies have been developed and applied by Biovail, allowing for simpler manufacturing of ODTs as well.

 

MACROCAP

 

Macrocap consists of immediate-release beads made by extrusion/spheronization/pelletization techniques, or by layering powders or solutions onto nonpareil seeds. Release-modulating polymers are applied on the beads using a variety of specialized coating techniques. The coated beads are filled into hard gelatin capsules. Drug release occurs by diffusion associated with bioerosion or by osmosis via the surface membrane. The release mechanism can be pH-activated or pH-independent. The beads can be formulated to produce first-order or zero-order release.

 

CEFORM™

 

CEFORM™ is a microsphere technology used to produce uniformly sized and shaped microspheres of a wide range of pharmaceutical compounds. The microspheres are nearly perfectly spherical in shape and, typically, each one has a target diameter between 50-600 microns, depending on the application. For example, 150-180 micron microspheres may be used for FlashDose®, with high drug content and a tastemask coating applied for oral cavity dispersion. CEFORM™ microspheres are produced using a continuous, single-step and solvent-free manufacturing process. It can be used to formulate drugs that are generally thermally unstable because of the very brief application of heat and the wide range of temperatures which can be used in the manufacturing process. Depending on the desired release characteristics and oral dosage format, CEFORM™ microspheres can be formulated for controlled release, enhanced absorption, delayed release, rapid absorption or taste masking.

 

ZERO-ORDER RELEASE SYSTEM (“ZORS™”)

 

ZORS™ is a technology that allows Biovail to develop zero-order kinetic systems, based on a proprietary controlled-release matrix coating. ZORS™ allows the Company to develop controlled-release tablets that alleviate food effect in drugs known to have their pharmacokinetic profile influenced by meals.

 

MULTIPART

 

Multipart consists of a tablet carrier for the delivery of controlled release beads that preserves the integrity and release properties of the beads. The distribution of the beads is triggered by disintegration of the tablet carrier in the stomach. Drug release from the beads can be pH-activated or pH-independent, and can occur by disintegration or osmosis. The beads can be formulated to produce first-order or zero-order release.

 

OTHER DRUG-DELIVERY SYSTEMS

 

Biovail is in the process of filing new patents for drug-delivery technologies amenable to very low doses of drugs in once-daily, extended-release formulations with optimal absorption profiles, as well as the optimization of site-specific absorption of controlled- release oral drugs.

 

35



 

 

36



 

Product Pipeline

 

In 2006, Biovail undertook a comprehensive review of its product development pipeline, accelerating those projects of significant value, terminating others, and initiating new ones.

 

Given the competitive nature of the specialty pharmaceuticals industry, and the fact that Biovail’s products are not typically protected by composition-of-matter patents, the Company must carefully manage the level of disclosure associated with its pipeline products. Biovail strongly believes that this course of action is in the best interest of the Company and its long-term shareholders, as it may provide a longer period of market exclusivity for its products.

 

The following table lists some of the programs that are currently in development:

 

PROGRAM

 

INDICATION

 

U.S. MARKET SIZE

 

 

 

 

 

 

 

CENTRAL NERVOUS SYSTEM DISORDERS

 

 

 

 

 

BVF-012 - VENLAFAXINE

 

DEPRESSION

 

$13.5 BILLION

 

BVF-033 - BUPROPION SALT

 

DEPRESSION

 

$13.5 BILLION

 

BVF-045 - BUPROPION COMBO

 

DEPRESSION

 

$13.5 BILLION

 

BVF-065 - UNDISCLOSED

 

DEPRESSION

 

$13.5 BILLION

 

BVF-087 - UNDISCLOSED

 

UNDISCLOSED

 

$5.0 BILLION

 

 

 

 

 

 

 

PAIN MANAGEMENT

 

 

 

 

 

BVF-127 - TRAMADOL (CANADA)

 

PAIN

 

$11.8 BILLION

 

BVF-146 - TRAMADOL/NSAID COMBO

 

PAIN

 

$11.8 BILLION

 

 

 

 

 

 

 

CARDIOVASCULAR DISEASE

 

 

 

 

 

BVF-211 - CARVEDILOL

 

HYPERTENSION

 

$19.5 BILLION

 

BVF-239 - UNDISCLOSED

 

HYPERTENSION

 

$19.5 BILLION

 

 

 

 

 

 

 

GASTROINTESTINAL DISEASE

 

 

 

 

 

BVF-300 - UNDISCLOSED

 

UNDISCLOSED

 

$14.0 BILLION

 

 

Biovail’s product development efforts are subject to the process and regulatory requirements of the U.S. Food and Drug Administration (FDA) and the Canadian Therapeutic Products Directorate (TPD). Since the Company focuses on novel formulations of existing drugs (with well-established safety and efficacy profiles), the development path it faces is generally less onerous than the path facing companies which pursue new chemical entities.

 

37



 

 

38


 

2006 Commercial Portfolio

 

PRODUCT

 

THERAPEUTIC AREA

 

INDICATION(S)

 

 

 

 

 

DISTRIBUTED BY BIOVAIL PHARMACEUTICALS, INC.

 

 

CARDIZEM® CD

 

CARDIOVASCULAR

 

HYPERTENSION/ANGINA

ATIVAN®

 

CENTRAL NERVOUS SYSTEM

 

ANXIETY

VASOTEC®

 

CARDIOVASCULAR

 

HYPERTENSION/CONGESTIVE

 

 

 

 

HEART FAILURE

VASERETIC®

 

CARDIOVASCULAR

 

HYPERTENSION/CONGESTIVE

 

 

 

 

HEART FAILURE

ISORDIL®

 

CARDIOVASCULAR

 

ANGINA

ZOVIRAX® CREAM(1)

 

ANTIVIRAL

 

HERPES LABIALIS (COLD SORES)

ZOVIRAX® OINTMENT(1)

 

ANTIVIRAL

 

GENITAL HERPES

 

 

 

 

 

PROMOTED / DISTRIBUTED BY BIOVAIL PHARMACEUTICALS CANADA

 

 

TIAZAC®

 

CARDIOVASCULAR

 

HYPERTENSION/ANGINA

TIAZAC® XC

 

CARDIOVASCULAR

 

HYPERTENSION

GLUMETZA™

 

CARDIOVASCULAR

 

 

WELLBUTRIN® XL(2) AND WELLBUTRIN® SR

 

CENTRAL NERVOUS SYSTEM

 

DEPRESSION

MONOCOR®

 

CARDIOVASCULAR

 

HYPERTENSION

RETAVASE®

 

CARDIOVASCULAR

 

ACUTE MYOCARDIAL INFARCTION

ZYBAN®

 

CENTRAL NERVOUS SYSTEM

 

SMOKING CESSATION

CARDIZEM® CD

 

CARDIOVASCULAR

 

HYPERTENSION/ANGINA

 

 

 

 

 

DISTRIBUTED BY PARTNERS

 

 

 

 

WELLBUTRIN XL®

 

CENTRAL NERVOUS SYSTEM

 

DEPRESSION

CARDIZEM® LA(3)

 

CARDIOVASCULAR

 

HYPERTENSION/ANGINA

ULTRAM® ER

 

PAIN MANAGEMENT

 

CHRONIC PAIN

TIAZAC®(4)

 

CARDIOVASCULAR

 

HYPERTENSION/ANGINA

 

 

 

 

 

BIOEQUIVALENT (GENERIC) PRODUCTS

 

 

 

 

ADALAT® CC

 

CARDIOVASCULAR

 

HYPERTENSION/ANGINA

(NIFEDIPINE EXTENDED RELEASE)(5)

 

 

 

 

CARDIZEM® CD

 

CARDIOVASCULAR

 

HYPERTENSION/ANGINA

(DILTIAZEM CONTROLLED RELEASE)(6)

 

 

 

 

PROCARDIA® XL

 

CARDIOVASCULAR

 

HYPERTENSION/ANGINA

(NIFEDIPINE EXTENDED RELEASE)(5)

 

 

 

 

TIAZAC® (DILTIAZEM)(7)

 

CARDIOVASCULAR

 

HYPERTENSION/ANGINA

TRENTAL® (PENTOXIFYLLINE)(5)

 

CARDIOVASCULAR

 

PERIPHERAL VASCULAR DISEASE

VOLTAREN® XR

 

INFLAMMATION

 

ARTHRITIS

(DICLOFENAC CONTROLLED RELEASE)(5)

 

 

 

 

 


(1)          As of December 2006, Zovirax® Ointment and Zovirax® Cream are promoted by Sciele Pharma, Inc. for BPI.

(2)          Wellbutrin® XL was launched by BPC in Canada in April 2006.

(3)          As of May 2005, Cardizem® LA is promoted and distributed by Kos (Kos was acquired by Abbott Laboratories in December 2006).

(4)          Tiazac® is distributed by Forest Laboratories, Inc. in the United States.

(5)          Distributed by Teva in the U.S.

(6)          Distributed by Teva in the U.S. and Novopharm, a subsidiary of Teva, in Canada.

(7)          Distributed by Forest in the U.S. and Novopharm in Canada.

 

39



 

 

FINANCIAL REVIEW

 

41                                    Management’s Discussion and Analysis

 

75                                    Management Report

 

76                                    Report of Independent Registered Public Accounting Firm

 

78                                    Consolidated Financial Statements

 

82                                    Notes to Consolidated Financial Statements

 

124                              Board of Directors and Executive Officers

 

126                              Selected Quarterly Data

 

127                              Ten-Year Financial Summary

 

ibc                                Shareholder Information

 

40



 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

RESULTS OF OPERATIONS AND FINANCIAL CONDITION

 

(All dollar amounts expressed in U.S. dollars)

 

The following Management’s Discussion and Analysis of Results of Operations and Financial Condition (“MD&A”) should be read in conjunction with our audited consolidated financial statements and related notes thereto prepared in accordance with United States (“U.S.”) generally accepted accounting principles.

 

Additional information relating to Biovail Corporation (“Biovail”), including our Annual Report on Form 20-F, is available on SEDAR at www.sedar.com.

 

The discussion and analysis contained in this MD&A are as of March 21, 2007.

 

FORWARD-LOOKING STATEMENTS

 

To the extent any statements made in this MD&A contain information that is not historical, these statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and may be forward-looking information within the meaning of the “safe harbour” provisions of applicable Canadian securities legislation (collectively “forward-looking statements”). These forward-looking statements relate to, among other things, our objectives, goals, strategies, beliefs, intentions, plans, estimates, and outlook, including, without limitation, statements concerning the following:

 

                  Future revenue and operating results following the loss of Wellbutrin XL® market exclusivity;

 

                  Cost savings and other impacts of restructuring activities in the U.S.;

 

                  Commercialization strategy in the U.S.;

 

                  Increased focus on research and development;

 

                  Ability to make future dividend payments;

 

                  Redemption of our 77/8% Senior Subordinated Notes due April 1, 2010 (“Notes”);

 

                  Launch of Wellbutrin XR® in Europe;

 

                  Finalization of supply contracts;

 

                  Sufficiency of inventory levels of Wellbutrin SR® and Zyban®;

 

                  Timing and progress of clinical trials;

 

                  Timing of regulatory submissions of our products;

 

                  Timing of regulatory responses and approval of our products;

 

                  Success of our development efforts;

 

                  Manufacturing and commercialization of pipeline products that are successfully developed;

 

                  Estimates of future restructuring costs;

 

                  Estimates of contract losses;

 

                  Results of certain litigations and regulatory proceedings;

 

                  Timing and amount of future capital expenditures;

 

                  Sufficiency of cash resources to support future spending requirements; and

 

                  Timing and amount of potential milestone payments.

 

Forward-looking statements can generally be identified by the use of words such as “believe”, “anticipate”, “expect”, “intend”, “plan”, “will”, “may” and other similar expressions. In addition, any statements that refer to

 

41



 

expectations, projections or other characterizations of future events or circumstances are forward-looking statements. An MD&A by its nature has many forward-looking statements and although we have indicated above certain of these statements set out herein, all of the statements in this MD&A that contain forward-looking statements are qualified by these cautionary statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements, including, but not limited to, factors and assumptions regarding prescription trends, pricing and the formulary and/or Medicare/Medicaid positioning for our products; the competitive landscape in the markets in which we compete, including, but not limited to, the availability or introduction of generic formulations of our products; and timelines associated with the development of, and receipt of regulatory approval for, our new products; and actual results may differ materially from those expressed or implied in such statements. Important factors that could cause actual results to differ materially from these expectations include, among other things: the difficulty of predicting U.S. Food and Drug Administration (“FDA”) and Canadian Therapeutic Products Directorate (“TPD”) approvals, acceptance and demand for new pharmaceutical products, the impact of competitive products and pricing, new product development and launch, reliance on key strategic alliances, availability of raw materials and finished products, the regulatory environment, the outcome of legal proceedings, consolidated tax-rate assumptions, fluctuations in operating results and other risks detailed from time to time in our filings with the U.S. Securities and Exchange Commission (“SEC”), the Ontario Securities Commission, and other securities regulatory authorities in Canada, as well as our ability to anticipate and manage the risks associated with the foregoing. Additional information about these factors and about the material factors or assumptions underlying such forward-looking statements may be found in the body of this document, as well as under the heading “Risk Factors” under Item 3, Sub-Part D of our most recent Annual Report on Form 20-F. We caution that the foregoing list of important factors that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to Biovail, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. We undertake no obligation to update or revise any forward-looking statement.

 

COMPANY PROFILE

 

We are a specialty pharmaceutical company, engaged in the formulation, clinical testing, registration, manufacture and commercialization of pharmaceutical products. Our core competency is the development and large-scale manufacture of pharmaceutical products incorporating oral drug-delivery technologies. Our main therapeutic areas of focus are central nervous system disorders, pain management, and cardiovascular disease. We have various research and development, clinical research, manufacturing and commercial operations located in Barbados, Canada, the U.S., Puerto Rico and Ireland.

 

We have a portfolio of products that includes the following established brand names:

 

                  Wellbutrin® (bupropion) for the treatment of depression;

 

                  Zovirax® (acyclovir) for the treatment of herpes;

 

                  Ultram® (tramadol) for the treatment of moderate to moderately severe chronic pain; and

 

                  Cardizem®/Tiazac® (diltiazem) for the treatments of hypertension and angina.

 

Our products are marketed in the U.S. principally through supply and distribution agreements with other pharmaceutical companies that have established sales and marketing infrastructures. Under such agreements, we manufacture and supply Wellbutrin XL® to GlaxoSmithKline plc (“GSK”); Ultram® ER to Ortho-McNeil, Inc. (“OMI”); and Cardizem® LA to Kos Pharmaceuticals, Inc. (“Kos”) (which was acquired by Abbott Laboratories in December 2006). In Canada, our products, such as Wellbutrin® XL and Tiazac® XC, are marketed through our internal sales organization.

 

42



 

OVERVIEW

 

Our revenue from product sales increased 16% to over $1 billion in 2006, primarily due to the performance of our portfolio of branded products. As branded products comprise approximately 80% of our product sales and are priced higher than generic products, generic competition is one of our leading challenges. A large portion of a branded product’s commercial value is usually realized during the period in which the product has market exclusivity. Upon the loss of that exclusivity, we can expect to lose a significant portion of a product’s pre-genericization sales in a short period of time, which can have a material adverse effect on our future revenue and profitability. To address this challenge, we will continue to:

 

                  Aggressively defend our intellectual property against infringement, as intellectual property contributes a great deal to our competitive advantage;

 

                  Invest heavily in research and development to generate new innovative products to ensure our product portfolio is renewed over time to offset future revenue losses due to generic competition; and

 

                  Manufacture and sell generic versions of certain of our branded products.

 

Within our branded product portfolio, Wellbutrin XL® has been a key contributor to our revenue, results of operations and cash flows, accounting for approximately 40% of total product sales and gross profit since its introduction in September 2003. In December 2006, the FDA granted approval for the first generic versions of Wellbutrin XL® As a result, Teva Pharmaceuticals Industries Ltd. (“Teva”) immediately launched a generic version of 300mg Wellbutrin XL® product, which has resulted in a substantial loss in our sales of that strength in the first quarter of 2007, compared with the fourth quarter of 2006. In February 2007, however, we entered into a comprehensive settlement with a number of companies, including Teva, related to Wellbutrin XL®. As a result of this settlement, with certain defined exceptions, none of those companies may market a generic version of 150mg Wellbutrin XL® product until 2008.

 

In anticipation of the loss of Wellbutrin XL® exclusivity, we implemented a strategy to reduce our overall cost structure and to develop new products more quickly. As a result, we will no longer maintain a direct commercial presence in the U.S. primary-care or specialty pharmaceutical markets. Instead we intend to enter exclusively into supply and distribution agreements with other pharmaceutical companies to promote our products to both primary-care and specialist physicians in the U.S. We believe this model will deliver greater value to our products by utilizing marketing partners with expertise in our therapeutic areas of focus, while enabling us to lower our overhead and infrastructure costs. Another important aspect of our strategy is a targeted focus on a number of core research and development programs. We intend to increase our investment in research and development over the next several years, as the development of new products is essential for the continued strong operation and growth of our business. However, it is important to recognize that a successful product-development program reflects investments that we make over many years.

 

In spite of the expected cost savings from the strategic decisions we have made, our financial performance in 2007 will be materially impacted by the loss of exclusivity in the U.S. of our 300mg Wellbutrin XL® product.

 

KEY PERFORMANCE DRIVERS

 

We will continue to execute our strategy for long-term growth by focusing on the following key performance drivers:

 

                  Development of new products through the application of our drug-delivery technologies to create: (i) enhanced formulations of existing products; (ii) combination products; and (iii) difficult-to-manufacture generic pharmaceuticals.

 

                  Forming strategic commercial alliances with other pharmaceutical companies on favourable terms.

 

43



 

                  Protection of our intellectual property and successful defence of our products and proprietary technologies from infringement.

 

                  Prudent use of our cash resources to provide a return to shareholders while eliminating long-term debt and maintaining sufficient capital to invest in growing our business.

 

                  Control of expenses through initiatives to achieve lower operating costs, more focused development efforts, and improved manufacturing efficiencies.

 

                  Generation of higher revenue and profitability in Canada from our existing promoted products, and through the acquisition or development of new products that provide a strategic fit.

 

Despite our efforts, however, no assurance can be given that the loss of market exclusivity of key products, or certain other significant factors will not have a material adverse effect on our business and financial performance.

 

EXECUTIVE MANAGEMENT TEAM

 

During the past year, we made the following changes to our executive management team:

 

                  Kenneth Howling was appointed Senior Vice-President, Chief Financial Officer (“CFO”), following the departure of Charles Rowland, our former CFO, in December 2006.

 

                  Wendy Kelley joined Biovail as Senior Vice-President, General Counsel and Corporate Secretary. Kenneth Cancellara, our former General Counsel, retired from Biovail in January 2007.

 

                  Dr. Peter Silverstone joined Biovail as Senior Vice-President, Medical and Scientific Affairs. Dr. Silverstone succeeded Dr. Gregory Szpunar, our former Chief Scientific Officer, who left Biovail in March 2006. Dr. Silverstone’s responsibilities focus on the clinical development and registration of our pipeline products.

 

                  Gilbert Godin joined Biovail as Senior Vice-President, Technical Operations/Drug Delivery. Mr. Godin’s responsibilities focus on Biovail’s product-development capability, as well as manufacturing and contract-development services.

 

                  Michel Chouinard was appointed Chief Operating Officer of Biovail Laboratories International SRL.

 

RESTRUCTURING

 

In May 2005, we sold the distribution rights to Cardizem® LA in the U.S. and Puerto Rico, and transferred all of our product rights and certain inventories related to Teveten and Teveten HCT, to Kos. Concurrent with the Kos transaction, we restructured our commercial operations in the U.S. At that time, we reduced our primary-care and specialty sales forces and related functions by 493 positions (including 186 sales representatives who were offered employment by Kos) and administrative functions by 30 positions. We retained 85 specialty sales representatives at that time to focus on the promotion of Zovirax® Ointment and Zovirax® Cream to specialist practitioners, as well as to provide co-promotion services to other pharmaceutical companies.

 

In December 2006, we eliminated our remaining U.S. specialty sales force, and implemented other measures to reduce the operating and infrastructure costs of our U.S. operations, including the abandonment of large-scale manufacturing at our Chantilly, Virginia facility. We reduced our sales force and related functions by 115 positions, and administrative and other functions by 73 positions. These measures were considered necessary to address a lack of product-acquisition or co-promotion opportunities, available to us on reasonable terms, to fully utilize our sales force. In December 2006, we consequently entered into a five-year exclusive promotional services agreement with Sciele Pharma, Inc. (“Sciele”), whereby we will pay Sciele an annual fee to provide

 

44



 

detailing and sampling support for Zovirax® Ointment and Zovirax® Cream to U.S. physicians. Sciele is also entitled to additional payments if certain tiered revenue targets are met each calendar year.

 

We anticipate that the cost savings associated with the reduction in headcount in our U.S. operations will have a material positive impact on our results of operations, financial position and cash flows. These savings, however, will be mitigated by the compensation we will pay Sciele for its promotional services.

 

STOCK-BASED COMPENSATION

 

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Prior to January 1, 2006, we recognized employee stock-based compensation under the intrinsic value-based method of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Accordingly, no compensation expense for stock options granted to employees at fair market value was included in the determination of net income prior to January 1, 2006. We elected to use the modified-prospective transition method of adoption. This method requires that compensation expense be recorded for all share-based payments granted, modified or settled after the date of adoption and for all unvested stock options at the date of adoption. Prior periods have not been restated to recognize stock-based compensation expense.

 

In 2006, we recognized total stock-based compensation expense related to stock options, net of estimated forfeitures, as follows:

 

 

 

($ in 000s)

 

Cost of goods sold

 

$

1,072

 

Research and development expenses

 

1,834

 

Selling, general and administrative expenses

 

11,888

 

 

 

$

14,794

 

 

As a result of the adoption of SFAS 123R, net income was $14.6 million (basic and dilutive earnings per share of $0.09) lower in 2006 than if we had continued to account for stock-based compensation under APB 25.

 

At December 31, 2006, the total remaining unrecognized compensation expense related to non-vested stock options amounted to approximately $13.6 million, which will be amortized on a straight-line basis over the weighted-average remaining requisite service period of approximately 19 months.

 

45



 

SELECTED ANNUAL INFORMATION

 

The following table provides selected financial information for the last three years:

 

 

 

Years Ended December 31

 

 

 

2006

 

2005

 

2004

 

 

 

($ in 000s, except per share data)

 

Revenue

 

$

1,070,529

 

$

935,536

 

$

879,156

 

Income from continuing operations

 

207,796

 

246,796

 

166,209

 

Net income

 

203,948

 

236,221

 

160,994

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per share

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.30

 

$

1.55

 

$

1.04

 

Net income

 

$

1.27

 

$

1.48

 

$

1.01

 

Cash dividends declared per share

 

$

1.00

 

$

0.50

 

$

 

Total assets

 

$

2,175,112

 

$

2,028,812

 

$

1,711,060

 

Long-term obligations

 

411,791

 

436,868

 

478,936

 

 

Revenue

 

Total revenue increased 14% from 2005 to 2006, due mainly to higher revenue from sales of Wellbutrin XL® to GSK, and the added contribution from sales of Ultram® ER to OMI. These factors were partially offset by lower product sales in Canada, due mainly to the negative impact of generic competition to Tiazac® and Wellbutrin® SR. Product sales were also negatively impacted by certain manufacturing issues we experienced during 2006 related to the production of lower dosage 120mg and 180mg Cardizem® LA products. We resumed full production of Cardizem® LA in early 2007, following the completion of our investigation and remediation efforts, and have substantially addressed any shortfall in our supply to Kos.

 

Total revenue increased 6% from 2004 to 2005, due mainly to higher Wellbutrin XL® and Zovirax® product sales, as well as sales of our off-patent branded pharmaceutical (Legacy) products. These factors were partially offset by the elimination of Teveten and Teveten HCT product sales following the Kos transaction, and lower sales of our Generic products. In 2004, Zovirax® and Legacy product sales in the U.S. were negatively impacted by a work-down of wholesaler inventory levels.

 

Results of operations

 

Our income from continuing operations and net income were impacted by specific factors that affected the comparability of those results between years. We believe that the identification of these factors enhances an analysis of our results of operations when comparing our results with those of a previous or subsequent period. In addition, management excludes these factors when analyzing operating performance. However, it should be noted that the determination of these factors involves judgment by management.

 

Our income from continuing operations and net income in 2006 were impacted by the following significant factors:

 

                  Asset impairments of $147.0 million related to the write-down of Vasotec® and Vaseretic® trademarks and product rights, and Glumetza® product rights;

 

                  Estimated contract losses of $54.8 million for payments that we are required to make to GSK as a result of the introduction of generic competition to Wellbutrin XL®, and to Kos for lost profits due to our failure to supply minimum required quantities of Cardizem® LA;

 

46



 

                  Restructuring costs of $15.1 million; and

 

                  Litigation settlements of $14.4 million mainly related to a payment in respect to a patent infringement suit involving Wellbutrin XL®.

 

Our income from continuing operations and net income in 2005 were impacted by the following significant factors:

 

                  Asset impairments of $29.2 million mainly related to the write-down of Teveten and Teveten HCT product rights transferred to Kos;

 

                  Restructuring costs of $19.8 million; and

 

                  Write-off of $4.9 million of Cardizem® LA, Teveten and Teveten HCT inventories that were not purchased by Kos.

 

Our income from continuing operations and net income in 2004 were impacted by the following significant factors:

 

                  Asset impairments of $42.2 million mainly related to the write-down of a portion of our investment in Ethypharm S.A. (“Ethypharm”); and

 

                  Acquired research and development expense of $8.6 million associated with our acquisition of BNC-PHARMAPASS, LLC (“BNC-Pharmapass”).

 

The collective impact of all factors affecting the comparability of our income from continuing operations and net income for the last three years, as well as the impact of those factors on basic and diluted earnings per share, are identified in the following table:

 

 

 

Years Ended December 31

 

 

 

2006

 

2005

 

2004

 

 

 

($ in 000s, except per share data)

 

Asset impairments

 

$

147,000

 

$

29,230

 

$

42,156

 

Contract losses

 

54,800

 

 

 

Restructuring costs

 

15,126

 

19,810

 

 

Gain on disposal of intangible assets

 

(4,000

)

 

(1,471

)

Litigation settlements

 

14,400

 

 

 

Equity loss

 

529

 

1,160

 

4,179

 

Write-off of inventory

 

 

4,862

 

 

Acquired research and development

 

 

 

8,640

 

Impact on income from continuing operations

 

227,855

 

55,062

 

53,504

 

Asset impairments of discontinued operation

 

1,084

 

5,570

 

 

Impact on net income

 

$

228,939

 

$

60,632

 

$

53,504

 

 

 

 

 

 

 

 

 

Impact on basic earnings per share

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.42

 

$

0.35

 

$

0.34

 

Net income

 

$

1.43

 

$

0.38

 

$

0.34

 

 

 

 

 

 

 

 

 

Impact on diluted earnings per share

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.42

 

$

0.34

 

$

0.34

 

Net income

 

$

1.43

 

$

0.38

 

$

0.34

 

 

47



Cash dividends

 

Cash dividends declared per share were $1.00 and $0.50 in 2006 and 2005, respectively. No dividends were declared in 2004. In December 2006, our Board of Directors adopted a new dividend policy that contemplates the payment of an annual dividend of $1.50 per share (to be paid in quarterly increments). The declaration of future dividends pursuant to this policy will be subject to the discretion of the Board, and will be dependent on our financial condition and operating results.

 

Financial condition

 

Total assets increased $146.3 million from 2005 to 2006, due mainly to an increase in cash and cash equivalents, partially offset by the amortization and impairment of intangible assets. The increase in cash and cash equivalents reflected cash generated from continuing operations less payments of cash dividends; additions to property, plant and equipment; and repayments of long-term obligations. We ended 2006 with cash resources in excess of $800 million.

 

At December 31, 2006, long-term obligations included the outstanding $398.9 million principal amount of our Notes. On February 27, 2007, we issued a notice of redemption of all our outstanding Notes effective April 1, 2007 at a price of 101.969% of the principal amount. We intend to utilize our existing cash resources to finance the redemption of our Notes.

 

RESULTS OF OPERATIONS

 

In 2006, we operated our business on the basis of a single reportable segment — pharmaceutical products. This basis reflected how management reviewed the business, made investing and resource allocation decisions, and assessed operating performance.

 

REVENUE

 

Our revenue is derived primarily from the following sources:

 

                  Sales of pharmaceutical products developed and manufactured by us, as well as sales of proprietary and in-licensed products;

 

                  Pharmaceutical clinical research and laboratory testing services, and product development activities in collaboration with third parties; and

 

                  Royalties from the sale of products we developed or acquired, as well as the co-promotion of pharmaceutical products owned by other companies.

 

48



 

The following table displays the dollar amount of each source of revenue for the last three years, the percentage of each source of revenue, compared with total revenue in the respective year, and the percentage changes in the dollar amount of each source of revenue. Percentages may not add due to rounding.

 

 

 

Years Ended December 31

 

Percentage
Change

 

 

 

2006

 

2005

 

2004

 

2005

 

2004

 

 

 

$

 

%

 

$

 

%

 

$

 

%

 

to 2006

 

to 2005

 

 

 

($ in 000s)

 

 

 

 

 

Product sales

 

1,024,085

 

96

 

884,267

 

95

 

837,102

 

95

 

16

%

6

%

Research and development

 

21,593

 

2

 

27,949

 

3

 

19,279

 

2

 

(23

)%

45

%

Royalty and other

 

24,851

 

2

 

23,320

 

2

 

22,775

 

3

 

7

%

2

%

 

 

1,070,529

 

100

 

935,536

 

100

 

879,156

 

100

 

14

%

6

%

 

Product sales

 

The following table displays product sales by category for the last three years, the percentage of each category, compared with total product sales in the respective year, and the percentage changes in the dollar amount of each category. Percentages may not add due to rounding.

 

 

 

Years Ended December 31

 

Percentage
Change

 

 

 

2006

 

2005

 

2004

 

2005

 

2004

 

 

 

$

 

%

 

$

 

%

 

$

 

%

 

to 2006

 

to 2005

 

 

 

($ in 000s)

 

 

 

 

 

Wellbutrin XL®

 

450,329

 

44

 

354,213

 

40

 

317,298

 

38

 

27

%

12

%

Zovirax®

 

112,388

 

11

 

95,858

 

11

 

75,451

 

9

 

17

%

27

%

Cardizem® LA

 

59,316

 

6

 

59,672

 

7

 

53,625

 

6

 

(1

)%

11

%

Ultram® ER

 

53,724

 

5

 

 

 

 

 

NM

 

NM

 

Biovail Pharmaceuticals Canada

 

68,723

 

7

 

99,508

 

11

 

101,865

 

12

 

(31

)%

(2

)%

Legacy

 

139,853

 

14

 

133,419

 

15

 

121,588

 

15

 

5

%

10

%

Generic

 

141,075

 

14

 

135,209

 

15

 

149,675

 

18

 

4

%

(10

)%

Teveten

 

(1,323

)

 

6,388

 

1

 

17,600

 

2

 

NM

 

(64

)%

 

 

1,024,085

 

100

 

884,267

 

100

 

837,102

 

100

 

16

%

6

%

 


NM — Not meaningful

 

Wellbutrin XL®

 

Our revenue from sales of Wellbutrin XL® increased 27% and 12% in 2006 and 2005, respectively, compared with the immediately preceding years, due to higher volumes sold by GSK and price increases effected by GSK in both 2006 and 2005, which positively affected our supply price to them.

 

Our supply price for Wellbutrin XL® brand product is based on an increasing tiered percentage of GSK’s net selling price. The supply price is reset to the lowest tier at the start of each calendar year and the sales-dollar thresholds to achieve the second and third tier supply prices generally increase each year. As a result of the aforementioned introduction of generic competition to 300mg Wellbutrin XL® product in December 2006, GSK’s total sales of Wellbutrin XL® brand product in 2007 may not meet the sales dollar-thresholds to achieve the second tier supply price, and are not expected to meet the third tier supply price.

 

49



 

GSK may decide to launch generic versions of Wellbutrin XL® in the U.S., and GSK anticipates that the European version of Wellbutrin XL®, which will be most commonly marketed as Wellbutrin XR®, could be available to patients in Europe as early as April 2007. We will be the exclusive manufacturer and supplier of generic Wellbutrin XL® and branded Wellbutrin XR® to GSK at fixed contractual supply prices. Those supply prices are substantially lower than the tiered supply price we currently receive on sales of Wellbutrin XL® brand product.

 

Zovirax®

 

Combined sales of Zovirax® Ointment and Zovirax® Cream increased 17% and 27% in 2006 and 2005, respectively, compared with the immediately preceding years, due to a combination of higher prescription volumes and price increases we effected for these products in each of the past three years, as well as the impact of a work-down of Zovirax® inventory in the wholesale distribution channel during 2004.

 

Cardizem® LA

 

Our revenue from sales of Cardizem® LA declined 1% in 2006, compared with 2005, and increased 11% in 2005, compared with 2004. The loss of revenue in 2006 that resulted from a backorder of 120mg and 180mg Cardizem® LA products, was largely offset by a cumulative adjustment of $7.2 million recorded in the third quarter of 2006 to recognize the positive impact on our supply price of price increases effected by Kos since its acquisition of Cardizem® LA. The increase in our revenue from sales of Cardizem® LA in 2005 was a result of a reduction in wholesaler inventory levels that occurred in 2004.

 

Ultram® ER

 

OMI launched Ultram® ER in the U.S. in February 2006. Our revenue from sales of Ultram® ER was impacted in the second quarter of 2006 by a provision of $7.8 million related to a voluntary Class II recall initiated by OMI of all lots of 300mg tablets (as well as one lot of 200mg tablets) due to a tablet printing-related matter. In June 2006, we resumed production of Ultram® ER (after the completion of the qualification and process validation of a new tablet printer), and we agreed to replace the recalled product, as well as certain lots of Ultram® ER that were still in OMI’s inventory, and to bear the costs of the recall (which are recorded in selling, general and administrative expenses).

 

Biovail Pharmaceuticals Canada (“BPC”) products

 

Key BPC products are Tiazac® XC, Tiazac®, Wellbutrin® XL, Wellbutrin® SR and Zyban®, which are sold in Canada to drug wholesalers, retail pharmacies and hospitals. We currently promote Tiazac® XC, Wellbutrin® XL and Glumetza™ directly to Canadian physicians. Sales of BPC products declined 31% and 2% in 2006 and 2005, respectively, compared with the immediately preceding years. The declines in BPC product sales reflected lower sales of Tiazac® and Wellbutrin® SR due to generic competition, partially offset by increased sales of our promoted Wellbutrin® XL and Tiazac® XC products. Sales of Tiazac® XC in 2006 were, however, negatively impacted by a backorder of 120mg and 180mg products, due to the same manufacturing issues that affected our production of Cardizem® LA. This backorder situation has been substantially addressed in early 2007.

 

GSK is no longer manufacturing and supplying us with Wellbutrin® SR and Zyban®. We have not presently located an alternative supplier for these products; however, we believe we have purchased sufficient inventory to meet anticipated customer requirements through 2007.

 

50



 

Legacy products

 

Our key Legacy products are Ativan®, Cardizem® CD, Isordil®, Tiazac®, Vasotec® and Vaseretic®, which are sold primarily in the U.S. We do not actively promote these products as they have been genericized. We sell Tiazac® (branded and generic) to Forest Laboratories, Inc. (“Forest”) for distribution in the U.S. Our other Legacy products are primarily sold directly to drug wholesalers and warehousing chains. Sales of our Legacy products increased 5% and 10% in 2006 and 2005, respectively, compared with the immediately preceding years. The increases in Legacy product sales reflected price increases we effected for certain of these products in each of the past three years, as well as the impact of reductions in wholesaler inventories of these products in 2004.

 

Generic products

 

Our key Generic products are bioequivalent versions of Adalat CC, Cardizem® CD , Procardia XL and Voltaren XR, which we manufacture and sell to a subsidiary of Teva for distribution in the U.S., as well as an authorized generic version of Tiazac®, which we manufacture and sell to a subsidiary of Teva for distribution in Canada. Generic Tiazac® was introduced in Canada in January 2006. Sales of our Generic products increased 4% in 2006, compared with 2005, and declined 10% in 2005, compared with 2004, which reflected the effect of changes in prescription volumes and pricing for these products, as well as changes in inventory levels of these products owned by Teva.

 

Teveten

 

Since May 2005, we no longer have an ongoing financial interest in Teveten and Teveten HCT. In 2006, we increased our estimate for returns related to our pre-May 2005 sales of these products by $1.3 million.

 

Research and development revenue

 

Research and development revenue declined 23% in 2006, compared with 2005, and increased 45% in 2005, compared with 2004, reflecting overall fluctuations in the level of clinical research and laboratory testing services provided to external customers by our contract research operation, as well as the negative impact of competitive pricing for those services in 2006.

 

Royalty and other revenue

 

Royalty and other revenue increased 7% and 2% in 2006 and 2005, respectively, compared with the immediately preceding years. In 2006, other revenue included $4.3 million related to our co-promotion of Ultram® ER in the U.S. and AstraZeneca Pharmaceuticals LP’s Zoladex® 3.6mg in the U.S. and Puerto Rico. We are no longer co-promoting Ultram® ER and Zoladex® as a result of the elimination of our U.S. specialty sales force. We are, however, continuing to promote Novartis Pharmaceuticals Canada Inc.’s Lescol® products in Canada.

 

51



 

OPERATING EXPENSES

 

The following table displays the dollar amount of each operating expense item for the last three years, the percentage of each item compared with total revenue in the respective year, and the percentage changes in the dollar amount of each item. Percentages may not add due to rounding.

 

 

 

Years Ended December 31

 

Percentage
Change

 

 

 

2006

 

2005

 

2004

 

2005

 

2004

 

 

 

$

 

%

 

$

 

%

 

$

 

%

 

to 2006

 

to 2005

 

 

 

($ in 000s)

 

 

 

 

 

Cost of goods sold

 

223,281

 

21

 

206,531

 

22

 

221,935

 

25

 

8

%

(7

)%

Research and development

 

95,479

 

9

 

88,437

 

9

 

68,382

 

8

 

8

%

29

%

Selling, general and administrative

 

238,441

 

22

 

227,394

 

24

 

253,531

 

29

 

5

%

(10

)%

Amortization

 

56,457

 

5

 

62,260

 

7

 

64,704

 

7

 

(9

)%

(4

)%

Asset impairments, net of gain on disposal

 

143,000

 

13

 

29,230

 

3

 

40,685

 

5

 

389

%

(28

)%

Restructuring costs

 

15,126

 

1

 

19,810

 

2

 

 

 

(24

)%

NM

 

Contract losses

 

54,800

 

5

 

 

 

 

 

NM

 

NM

 

Litigation settlements

 

14,400

 

1

 

 

 

 

 

NM

 

NM

 

Acquired research and development

 

 

 

 

 

8,640

 

1

 

NM

 

(100

)%

 

 

840,984

 

79

 

633,662

 

68

 

657,877

 

75

 

33

%

(4

)%

 


NM — Not meaningful

 

Cost of goods sold and gross margins

 

Gross margins based on product sales were 78%, 77% and 73% in 2006, 2005 and 2004, respectively.

 

The overall gross margin in 2006, compared with 2005, was positively impacted by the following factors:

 

                  Higher volumes of Wellbutrin XL® sold to GSK, as well as the positive impact on our supply price of the price increases effected by GSK in 2006 and 2005; and

 

                  The aforementioned cumulative adjustment to our supply price for Cardizem® LA to recognize past price increases effected by Kos.

 

Partially offset by:

 

                  A write-off to cost of goods sold of $11.4 million of rejected lots of Ultram® ER and Cardizem® LA;

 

                  An increase of $9.6 million in the amortization of intangible and other assets related to Cardizem® LA and Zovirax®;

 

                  The aforementioned product sales provision related to the return of withdrawn lots of Ultram® ER; and

 

                  Start-up manufacturing inefficiencies related to Ultram® ER.

 

The overall gross margin in the 2005, compared with 2004, was positively impacted by the following factors:

 

                  Manufacturing efficiencies achieved in the production of Wellbutrin XL®, as well as a decrease in the proportion of lower margin Wellbutrin XL® sample supplies versus trade product sales.

 

Partially offset by:

 

                  A provision of $5.7 million for Cardizem® CD inventory in excess of demand; and

 

52



 

                  The write-off of $4.9 million of Cardizem® LA, Teveten and Teveten HCT inventories not purchased by Kos.

 

Research and development expenses

 

Research and development expenses increased 8% and 29% in 2006 and 2005, respectively, compared with the immediately preceding years. Research and development expenses include employee compensation costs, overhead and occupancy costs, clinical trial, clinical manufacturing and scale-up costs, contract research services and other third-party development costs. Research and development expenses also include costs associated with providing contract research services to external customers.

 

Our research and development activities in 2006 primarily related to the following programs:

 

                  BVF-033 (bupropion salt). The FDA accepted our New Drug Application (“NDA”) for BVF-033 for review in November 2006. The FDA is expected to respond to our NDA in late July 2007.

 

                  BVF-146 (combination tramadol and non-steroidal anti-inflammatory drug) for the treatment of pain. We initiated Phase III clinical trials for BVF-146 in the fourth quarter of 2006.

 

                  BVF-127 (Tramadol ER). The TPD in Canada accepted our New Drug Submission for review in November 2006.

 

                  BVF-211 (carvedilol) for the treatment of hypertension.

 

                  BVF-045 (combination bupropion and another anti-depressant agent).

 

                  BVF-012 (venlafaxine enhanced absorption) for the treatment of depression.

 

In November 2006, we amended our April 2002 agreement with Ethypharm to include the development of: BVF-087 and BVF-065, which target central nervous system disorders; BVF-239, a cardiovascular product; and BVF-300, a product targeting the gastrointestinal-disease market. In February 2007, we obtained an option to license Depomed Inc.’s (“Depomed”) AcuForm® technology to develop up to two pharmaceutical products.

 

On an ongoing basis, we review and optimize the projects in our development portfolio to reflect changes in the competitive environment and emerging opportunities. Our future level of research and development expenditures will depend on, among other things, the outcome of clinical testing of our products under development; delays or changes in government required testing and approval procedures; technological developments; and strategic marketing decisions.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses increased 5% in 2006, compared with 2005, and declined 10% in 2005, compared with 2004. As a percentage of total revenue, selling, general and administrative expenses were 22%, 24% and 29% in 2006, 2005 and 2004, respectively.

 

The increase in selling, general and administrative expenses in 2006, compared with 2005, was primarily due to:

 

                  Higher legal expenses related to ongoing Wellbutrin XL® patent infringement actions, and other litigation and regulatory matters;

 

                  Inclusion of $11.9 million of stock-based compensation for stock options granted to employees, partially offset by a decline of $3.0 million in compensation expense related to deferred share units granted to directors due to a decrease in the underlying trading price of our common shares; and

 

                  Incremental spending to support the advertising and promotion of Ultram® ER, and costs associated with processing the Ultram® ER recall.

 

53



 

Partially offset by:

 

                  Cost savings associated with a reduction in headcount in our primary-care and cardiovascular specialty sales forces following the May 2005 restructuring of our U.S. commercial operations; and

 

                  Discontinuance of spending on sales and marketing activities to support Cardizem® LA, Teveten and Teveten HCT following the Kos transaction.

 

The decline in selling, general and administrative expenses in 2005, compared with 2004, was primarily due to:

 

                  The positive impact of the Kos transaction and concurrent restructuring of our U.S. commercial operations.

 

Partially offset by:

 

                  Higher legal expenses related to litigation and regulatory matters, and costs associated with our corporate governance and Sarbanes-Oxley Act of 2002 compliance initiatives; and

 

                  Inclusion of $3.0 million of compensation expense related to deferred share units granted to directors.

 

Amortization expense

 

Amortization expense declined 9% and 4% in 2006 and 2005, respectively, compared with the immediately preceding years. As a percentage of total revenue, amortization expense declined to 5% in 2006, compared with 7% in each of 2005 and 2004. The decline in amortization expense in 2006 reflected the discontinuance of the amortization of the Teveten and Teveten HCT product rights following the Kos transaction, as well as reduced amortization in the fourth quarter of 2006 related to the Vasotec® and Vaseretic® intangible assets following the write-down of those assets.

 

Asset impairments, net of gain on disposal

 

We perform an evaluation of long-lived assets and investments for impairment whenever events or changes in circumstances indicate that the carrying value of those assets may not be recoverable. Impairment exists when the carrying amount of an asset is not recoverable based on related undiscounted future cash flows, and its carrying amount exceeds its estimated fair value based on related discounted future cash flows. In 2006, we recorded an impairment charge of $147.0 million as a result of the following events or changes in circumstances:

 

                  In September 2006, we were informed by Kos that it had decided to discontinue its involvement with Vasocard™ (a combination of Vasotec® and Cardizem® LA). We had been developing Vasocard™ as a line extension to our Vasotec® and Vaseretic® product lines. We determined that without Kos’s continued involvement Vasocard™ had limited commercial potential and, consequently, we suspended its development. Our evaluation of the estimated future cash flows associated solely with the existing Vasotec® and Vaseretic® product lines resulted in an impairment charge of $132.0 million to the related trademarks and product rights.

 

                  In October 2006, Depomed was granted a new Canadian patent pertaining to Glumetza™. As a result, the prices we set for Glumetza™ are now subject to regulation by the Patented Medicine Prices Review Board (“PMPRB”) in Canada. Since its launch in the Canadian market in November 2005, the sales performance of Glumetza™ (in terms of prescription volumes) has been less than originally anticipated due to the competitive pricing and existing formulary listing of immediate-release generic formulations of metformin (the active drug compound in Glumetza™). We revised our sales forecast for Glumetza™ to reflect both the possible future pricing concessions that may be required by the PMPRB and the underlying prescription trend since the launch of this product. On the basis of this forecast, our

 

54



 

evaluation of the estimated future cash flows associated with the Glumetza™ product line resulted in an impairment charge of $15.0 million to the related product right.

 

Partially offsetting the impairment charge in 2006 was a $4.0 million gain we recorded on the disposal of four cardiovascular products to Athpharma Limited (“Athpharma”). We originally acquired these products from Athpharma in April 2003.

 

In 2005, we recorded an impairment charge of $29.2 million primarily related to the write-down of the carrying value of the Teveten and Teveten HCT product rights that were transferred to Kos. In 2004, we recorded a net impairment charge of $40.7 million primarily related to an other-than-temporary decline in the estimated fair value of our equity investment in Ethypharm.

 

Restructuring costs

 

In 2006 and 2005, we incurred restructuring charges of $15.1 million and $19.8 million, respectively, which consisted of employee termination benefits, asset impairments, contract termination costs and professional fees. At December 31, 2006, the liability balance related to restructuring costs incurred, but not paid or settled, was $11.9 million, of which $8.4 million related to employee termination benefits that will be substantially paid in the first half of 2007. Also in the first half of 2007, we expect to incur incremental restructuring costs of approximately $1.0 million, primarily related to employee retention bonuses and contract termination costs.

 

Contract losses

 

In 2006, we recorded a charge of $54.8 million related to the following contract losses:

 

                  As a result of the aforementioned introduction of generic competition to Wellbutrin XL®, we are required to make a payment to GSK under the terms of the Wellbutrin XL® agreement. The maximum amount of this payment was reduced by the total dollar amount of Wellbutrin XL® sample supplies that were purchased by GSK. At December 31, 2006, we accrued a contract loss of $46.4 million for the estimated amount of this payment based on GSK’s historical and forecasted sample supply purchases.

 

                  In September 2006, we received notification from Kos that a supply failure had occurred as a result of our inability to supply at least 50% of the quantity of Cardizem® LA ordered by Kos. At December 31, 2006, we accrued a contract loss of $8.4 million based on our estimate of the payment we may be required to make to compensate Kos for the lost profits it may have experienced as a result of our supply failure. This liability may be revised in subsequent periods based on the receipt of Kos’s own estimate of the amount of its lost profits; however, we estimate our maximum potential liability to Kos to be approximately $14.0 million.

 

Litigation settlements

 

In 2006, we recorded a charge of $14.4 million related to the following litigation settlements:

 

                  In February 2007, GSK reached a settlement with Andrx Corporation (“Andrx”) (which was acquired by Watson Pharmaceuticals, Inc. in November 2006) related to a patent infringement suit by Andrx in respect to its U.S. patent purportedly covering 150mg Wellbutrin XL® product. GSK agreed to make a one-time payment of $35.0 million to Andrx, while Andrx granted GSK a royalty-bearing license to its patent. Under the terms of the Wellbutrin XL® agreement with GSK, we agreed to reimburse GSK for $11.7 million (one-third) of the payment to Andrx, which we accrued at December 31, 2006, and to pay one-third of the ongoing royalty on sales of 150mg Wellbutrin XL® product.

 

                  At December 31, 2006, we accrued $2.7 million for our estimated share of the total consideration to be paid to settle certain antitrust claims related to our licensing of generic Adalat CC products.

 

55



 

Acquired research and development expense

 

Acquired research and development represents the cost of assets related to research and development projects that, as of the acquisition date, had not reached technological feasibility and had no alternative future use.

 

In 2004, we acquired Pharma Pass II, LLC’s (“PPII”) remaining interest in BNC-Pharmapass, a company that we formed in 2003 with PPII to advance the development of certain products. At the date of acquisition, we recorded a charge of $8.6 million to acquired research and development expense for the increase in our share of the fair values of the products under development.

 

NON-OPERATING ITEMS

 

Interest income and expense

 

Interest income was $29.2 million in 2006, compared with $7.2 million and $1.0 million in 2005 and 2004, respectively. The year-over-year increases in interest income reflected higher amounts of surplus cash available for investment.

 

Interest expense was $35.2 million in 2006, compared with $37.1 million and $40.1 million in 2005 and 2004, respectively. Interest expense mainly comprised interest on our Notes.

 

Following the redemption of our Notes effective April 1, 2007, we expect to save approximately $32 million in annual interest payments; however, those interest savings will be partially offset by lower interest income on our remaining cash resources.

 

Equity loss

 

We recorded equity losses of $0.5 million, $1.2 million and $4.2 million in 2006, 2005 and 2004, respectively, related to our investment in a venture fund that invests in early-stage biotechnology companies. Included in these equity losses was our share of goodwill impairment charges related to certain subsidiaries of this fund, as well as write-downs to the carrying values of other investments held by this fund. At December 31, 2006, we had invested a total of $6.8 million in this fund. As the nature of this fund is no longer consistent with our business strategy, we will not be making any additional capital contributions in it beyond our remaining commitment of $1.1 million.

 

Income taxes

 

Our effective tax rate reflected the fact that most of our income was derived from foreign subsidiaries with lower statutory tax rates than those that apply in Canada. We recorded provisions for income taxes of $14.5 million in 2006, compared with $22.6 million and $9.0 million in 2005 and 2004, respectively. Our effective tax rate was affected by the availability of unrecognized tax loss carryforwards that can be used to offset taxable income in Canada and the U.S.

 

DISCONTINUED OPERATION

 

On May 2, 2006, we completed the sale of our Nutravail division to Futuristic Brands USA, Inc. (“Futuristic”). In consideration for Nutravail’s inventory, long-lived assets and intellectual property, we are entitled to future payments based on the net revenues generated from those assets by Futuristic for a period of 10 years.

 

Subsequent to May 2, 2006, Nutravail’s operations and direct cash flows have been eliminated from our ongoing operations as a result of the sale transaction. The extent to which we are involved in the operations of Nutravail is limited to our ability to receive indirect cash flows from the future payments. We have no continuing

 

56



 

obligations in connection with the receipt of those payments, which are not expected to be significant to our continuing operations or those of Nutravail. Accordingly, the following amounts related to Nutravail have been reported as a discontinued operation in our consolidated statements of income and cash flows.

 

 

 

Years Ended December 31

 

 

 

2006

 

2005

 

2004

 

 

 

($ in 000s)

 

Revenue

 

$

1,289

 

$

5,532

 

$

7,387

 

Loss from discontinued operation before asset impairments

 

(2,764

)

(5,005

)

(5,215

)

Asset impairments

 

(1,084

)

(5,570

)

 

Loss from discontinued operation

 

$

(3,848

)

$

(10,575

)

$

(5,215

)

 

SUMMARY OF QUARTERLY RESULTS

 

The following table presents a summary of our quarterly results of operations and cash flows from continuing operations in 2006 and 2005:

 

 

 

2006

 

 

 

Q1

 

Q2

 

Q3

 

Q4

 

 

 

($ in 000s, except per share data)

 

Revenue

 

$

220,523

 

$

252,806

 

$

289,552

 

$

307,648

 

Income (loss) from continuing operations

 

68,606

 

80,322

 

(56,451

)

115,319

 

Net income (loss)

 

64,486

 

80,594

 

(56,451

)

115,319

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings (loss) per share

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.43

 

$

0.50

 

$

(0.35

)

$

0.72

 

Net income (loss)

 

$

0.40

 

$

0.50

 

$

(0.35

)

$

0.72

 

Net cash provided by continuing operating activities

 

$

94,692

 

$

110,806

 

$

81,382

 

$

235,637

 

 

 

 

2005

 

 

 

Q1

 

Q2

 

Q3

 

Q4

 

 

 

($ in 000s, except per share data)

 

Revenue

 

$

173,686

 

$

216,178

 

$

258,058

 

$

287,614

 

Income from continuing operations

 

12,059

 

4,922

 

109,299

 

120,516

 

Net income

 

11,132

 

3,707

 

101,663

 

119,719

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per share

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.08

 

$

0.03

 

$

0.69

 

$

0.75

 

Net income

 

$

0.07

 

$

0.02

 

$

0.64

 

$

0.75

 

Net cash provided by continuing operating activities

 

$

67,796

 

$

88,247

 

$

122,446

 

$

223,390

 

 

57



 

RESULTS FOR THE FOURTH QUARTER

 

Revenue

 

The increase in revenue in the fourth quarter of 2006, compared with the fourth quarter of 2005, was due mainly to an increase in revenue from sales of Wellbutrin XL®, which reflected the positive impact of a price increase effected by GSK in the second quarter of 2006, as well as the added contribution from sales of Ultram® ER in fourth quarter of 2006. These factors were partially offset by lower Tiazac® and Wellbutrin® SR product sales in Canada in the fourth quarter of 2006, due to generic competition.

 

The increase in revenue in the fourth quarter of 2006, compared with the first three quarters of 2006, was due mainly to the positive impact of the tiered supply price for Wellbutrin XL®, which is reset to the lowest tier at the start of each calendar year. In the second and third quarters of 2006, GSK’s net sales of Wellbutrin XL® exceeded the sales-dollar threshold to increase the supply price from the first to second tier and from the second to third and highest tier, respectively. As a result, all Wellbutrin XL® brand sales, except for any product held in inventory by GSK at the end of 2006, were recorded at the highest-tier supply price in the fourth quarter of 2006.

 

Results of operations

 

The increase in income from continuing operations and net income in the fourth quarter of 2006, compared with the fourth quarter of 2005, was due mainly to higher gross profit on Wellbutrin XL® and Ultram® ER product sales, as well as higher interest income. These factors were partially offset by charges in the fourth quarter of 2006 of $15.1 million for restructuring activities; $14.4 million for litigation settlements; and $3.5 million for contract losses.

 

The increase in income from continuing operations and net income in the fourth quarter of 2006, compared with the first three quarters of 2006, reflected the increasing gross margin on Wellbutrin XL® product sales due to the tiered supply price. The loss from continuing operations and net loss in the third quarter of 2006 was due mainly to the impact of charges of $147.0 million for asset impairments and $46.8 million for contract losses.

 

Cash flows

 

The increase in net cash provided by continuing operating activities in the fourth quarter of 2006, compared with the fourth quarter of 2005, was mainly related to higher gross profit on Wellbutrin XL® and Ultram® ER product sales, as well as increased collections of accounts receivable in the fourth quarter of 2006, offset partially by the receipt of a $60 million supply prepayment from OMI for Ultram® ER in the fourth quarter of 2005.

 

The increase in net cash provided by continuing operating activities in the fourth quarter of 2006, compared with the first three quarters of 2006, reflected higher gross profit recognized on Wellbutrin XL® and Ultram® ER product sales, as well as fluctuations in accounts receivable due to the amount and timing of product sales.

 

FINANCIAL CONDITION

 

The following table presents a summary of our financial condition at December 31, 2006 and 2005:

 

 

 

2006

 

2005

 

 

 

($ in 000s)

 

Working capital (total current assets less total current liabilities)

 

$

647,337

 

$

411,226

 

Long-lived assets

 

1,055,369

 

1,269,643

 

Long-term obligations

 

411,791

 

436,868

 

Shareholders’ equity

 

1,284,927

 

1,220,356

 

 

58


 

Working capital

 

The $236.1 million increase in working capital from 2005 to 2006 was primarily due to:

 

                  Cash generated from continuing operations of $522.5 million; and

 

                  A decrease in accounts payable of $16.5 million related to the timing of payments and lower payables related to capital expenditures, inventory purchases and professional fees.

 

Partially offset by:

 

                  Dividends declared of $160.3 million;

 

                  An increase in accrued contract losses of $54.8 million;

 

                  Additions to property, plant and equipment of $44.8 million;

 

                  An increase in accrued liabilities of $26.7 million mainly related to unpaid litigation settlements and restructuring costs; and

 

                  Repayments of long-term obligations of $25.5 million.

 

Long-lived assets

 

Long-lived assets comprise property, plant and equipment, goodwill, intangible and other assets, net of accumulated depreciation and amortization. The $214.3 million decrease in long-lived assets from 2005 to 2006 was primarily due to:

 

                  Asset impairment charge of $147.0 million related to write-down of the Vasotec®, Vaseretic® and Glumetza intangible assets; and

 

                  Depreciation of plant and equipment of $25.5 million and the amortization of intangible and other assets of $81.1 million.

 

Partially offset by:

 

                  Additions to property, plant and equipment of $44.8 million, which included expenditures related to the expansion of our manufacturing facility in Steinbach, Manitoba (which is now substantially complete) and the addition of equipment at our manufacturing facility in Dorado, Puerto Rico.

 

Long-term obligations

 

The $25.1 million decrease in long-term obligations, including the current portion thereof, from 2005 to 2006 was primarily due to:

 

                  Final payment of $14.0 million related to the May 2002 acquisition of Vasotec® and Vaseretic®; and

 

                  Payment of $11.3 million to GSK related to the October 2002 amendments to the Zovirax® distribution agreement.

 

Shareholders’ equity

 

The $64.6 million increase in shareholders’ equity from 2005 to 2006 was primarily due to:

 

                  Net income of $203.9 million (including $14.8 million of stock-based compensation recorded in additional paid-in capital); and

 

                  Proceeds of $15.6 million from the issuance of common shares, mainly on the exercise of stock options.

 

59



 

Partially offset by:

 

                  Dividends declared of $160.3 million.

 

CASH FLOWS

 

Our primary source of cash is the collection of accounts receivable related to product sales. Our primary uses of cash include salaries and benefits; inventory purchases; research and development programs; sales and marketing activities; capital expenditures; loan repayments; and dividend payments. The following table displays cash flow information for the last three years:

 

 

 

Years Ended December 31

 

 

 

2006

 

2005

 

2004

 

 

 

($ in 000s)

 

Net cash provided by continuing operating activities

 

$

522,517

 

$

501,879

 

$

279,566

 

Net cash provided by (used in) continuing investing activities

 

(40,447

)

31,825

 

(42,258

)

Net cash used in continuing financing activities

 

(92,256

)

(119,095

)

(334,526

)

Net cash used in discontinued operation

 

(558

)

(3,817

)

(2,481

)

Effect of exchange rate changes on cash and cash equivalents

 

(5

)

173

 

762

 

Net increase (decrease) in cash and cash equivalents

 

$

389,251

 

$

410,965

 

$

(98,937

)

 

Operating activities

 

Net cash provided by continuing operating activities increased $20.6 million from 2005 to 2006, primarily due to:

 

                  An increase of $148.7 million related to income from operations before changes in operating assets and liabilities, due mainly to higher gross profit on product sales, lower sales force and marketing costs, and higher interest income. Those factors were partially offset by higher legal expenses; and

 

                  An increase of $22.5 million related to the change in accrued liabilities, due mainly to unpaid litigation settlements and restructuring costs.

 

Partially offset by:

 

                  A decrease of $90.3 million related to the change in deferred revenue, due mainly to the receipt of the $60 million supply prepayment from OMI in 2005, as well as the portion of that prepayment and the deferred proceeds from the Kos transaction that were amortized in 2006;

 

                  A decrease of $35.7 million related to the change in inventories and accounts payable, due mainly to the timing of inventory purchases and payments;

 

                  A decrease of $13.7 million related to the timing of collection of accounts receivable; and

 

                  A decrease of $9.4 million related to the change in income taxes payable.

 

Net cash provided by continuing operating activities increased $222.3 million from 2004 to 2005, primarily due to:

 

                  An increase of $64.3 million related to income from operations before changes in operating assets and liabilities, due mainly to higher gross profit on product sales, and lower sales force and marketing costs;

 

                  An increase of $43.7 million related to the change in deferred revenue, due mainly to the receipt of the $60 million supply prepayment from OMI;

 

60



 

                  An increase of $43.1 million related to the change in inventories, due mainly to lower purchases related to Teveten and Teveten HCT following the Kos transaction, and a work-down of our inventories of Cardizem® CD and Zovirax® products, as well as an increase in our provision for inventory obsolescence related to Cardizem® CD;

 

                  An increase of $42.3 million related to the change in accounts payable, due mainly to the timing of payments and higher payables related to legal and consulting fees; and

 

                  An increase of $27.3 million related to the change in accrued liabilities, due mainly to lower payments related to product returns, rebates and chargebacks.

 

Investing activities

 

Net cash used in continuing investing activities increased $72.3 million from 2005 to 2006, primarily due to:

 

                  A decrease of $94.1 million in proceeds from the disposal of intangible assets, mainly related to consideration received in connection with the Kos transaction in 2005.

 

Partially offset by:

 

                  A decrease of $26.0 million in payments to acquire intangible assets, primarily related to the addition of the Glumetza™ product right in 2005.

 

Net cash provided by continuing investing activities increased $74.1 million from 2004 to 2005 primarily due to:

 

                  An increase of $95.1 million in proceeds from the disposal of intangible assets, mainly related to the Kos transaction; and

 

                  A decrease of $9.3 million in payments to acquire businesses, related to our acquisition of PPII’s remaining interest in BNC-Pharmapass in 2004.

 

Partially offset by:

 

                  An increase of $26.0 million in payments to acquire intangible assets, primarily related to the addition of the Glumetza™ product right; and

 

                  An increase of $9.8 million in capital expenditures on property, plant and equipment in 2005, mainly related to the expansion of our Steinbach manufacturing facility.

 

Financing activities

 

Net cash used in continuing financing activities declined $26.8 million from 2005 to 2006, primarily due to:

 

                  An increase of $12.6 million in proceeds from the issuance of common shares; and

 

                  A decrease of $14.1 million in repayments of long-term obligations, primarily related to the final payment in 2005 for Ativan® and Isordil®.

 

Net cash used in continuing financing activities declined by $215.0 million from 2004 to 2005 primarily due to:

 

                  A decrease of $280.0 million related to repayments under our credit facility in 2004; and

 

                  A decrease of $26.7 million in repayments of other long-term obligations, mainly related to the final payment in 2004 for the Canadian rights to Wellbutrin® and Zyban®.

 

61



 

Partially offset by:

 

                  An increase of $79.8 million related to dividends paid in 2005.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The following table displays our net financial asset position at December 31, 2006 and 2005:

 

 

 

At December 31

 

 

 

2006

 

2005

 

 

 

($ in 000s)

 

 

 

 

 

Financial assets

 

 

 

 

 

Cash and cash equivalents

 

$

834,540

 

$

445,289

 

Marketable securities

 

5,677

 

7,364

 

Total financial assets

 

840,217

 

452,653

 

 

 

 

 

 

 

Debt

 

 

 

 

 

Notes

 

399,379

 

400,552

 

Other long-term obligations

 

12,412

 

36,316

 

Total debt

 

411,791

 

436,868

 

Net financial assets

 

$

428,426

 

$

15,785

 

 

We believe that our existing cash resources, together with cash expected to be generated by operations and existing funds available under our credit facility, will be sufficient to support our operational, capital expenditure, debt repayment, interest requirements and dividend policy, as well as to meet our working capital needs, for at least the next 12 months, based on our current expectations. We intend to use $422.5 million of our existing cash resources to finance the early redemption of our Notes. That total comprises the principal amount of our Notes plus accrued interest to April 1, 2007, and an early redemption premium of $7.9 million to be paid to the noteholders. We anticipate total capital expenditures of approximately $55 million in 2007. Major projects include an expansion of our corporate office in Mississauga, Ontario, and the upgrade of our Dorado manufacturing facility. In the event that we make significant future acquisitions or change our capital structure, we may be required to raise additional funds through additional borrowings or the issuance of additional debt or equity securities.

 

Credit facility

 

In June 2006, we amended and renewed our $250 million credit facility with our banking syndicate. This amended facility has a three-year term with an annual extension option. At December 31, 2006, we had no outstanding borrowings under this facility. This facility may be used for general corporate purposes, including acquisitions, and includes an accordion feature, which allows it to be increased up to $400 million. At December 31, 2006, we were in compliance with all financial and non-financial covenants associated with this facility.

 

 

62



 

Credit ratings

 

Our current corporate credit ratings from Standard & Poor’s (“S&P”) and Moody’s Investors Service (“Moody’s”) are as follows:

 

 

 

S&P

 

Moody's

 

Overall corporate

 

BB+

 

Ba3

 

Credit facility

 

BBB–

 

NR

 

Senior Subordinated Notes

 

BB–

 

B1

 

Outlook

 

Stable

 

Stable

 

 


NR — Not rated

 

CONTRACTUAL OBLIGATIONS

 

The following table summarizes our contractual obligations at December 31, 2006:

 

 

 

Payments Due by Period

 

 

 

 

 

 

 

2008

 

2010

 

 

 

 

 

Total

 

2007

 

and 2009

 

and 2011

 

Thereafter

 

 

 

($ in 000s)

 

Long-term obligations, including interest payments(1)

 

$

425,859

 

$

425,859

 

$

 

$

 

$

 

Operating lease obligations

 

34,609

 

6,219

 

9,764

 

7,188

 

11,438

 

Purchase obligations(2)

 

129,411

 

68,384

 

33,724

 

24,866

 

2,437

 

Total contractual obligations

 

$

589,879

 

$

500,462

 

$

43,488

 

$

32,054

 

$

13,875

 

 


(1)          Our Notes are included as due for payment in 2007, as a result of our election to redeem them effective April 1, 2007.

(2)          Purchase obligations consist of agreements to purchase goods and services that are enforceable and legally binding and include obligations for minimum inventory and capital expenditures, and outsourced information technology, product promotion, and clinical research services.

 

The above table does not reflect any milestone payments in connection with research and development collaborations with third parties. These payments are contingent on the achievement of specific developmental, regulatory and/or commercial milestones. In addition, under certain arrangements, we may have to make royalty payments based on a percentage of future sales of the products in the event regulatory approval for marketing is obtained. From a business perspective, we view these payments favourably as they signify that the products are moving successfully through the development phase toward commercialization. We do not anticipate that we will be required to make any material milestone payments in 2007.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We did not have any off-balance sheet arrangements at December 31, 2006, other than operating leases, purchase obligations and contingent milestone payments, which are disclosed above under “Contractual Obligations”.

 

In the normal course of business, we enter into agreements that include indemnification provisions for product liability and other matters. If the indemnified party were to make a successful claim pursuant to the terms of the indemnification, we would be required to reimburse the loss. These provisions are generally subject to maximum amounts, specified claim periods, and other conditions and limits. Other than the aforementioned accrual for Kos’s estimated lost profit claim, no material amounts were accrued at December 31, 2006 for our obligations under these provisions.

 

63



 

OUTSTANDING SHARE DATA

 

At March 19, 2007, we had 160,466,541 issued and outstanding common shares, as well as outstanding options to purchase 7,322,104 common shares under our stock option plans.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to financial market risks, including changes in foreign currency exchange rates, interest rates on investments and debt obligations, and equity market prices on long-term investments. We use derivative financial instruments from time to time as a risk management tool and not for trading or speculative purposes.

 

Inflation has not had a significant impact on our results of operations.

 

Foreign currency risk

 

We operate internationally but a majority of our revenue and expense activities and capital expenditures are denominated in U.S. dollars. Our only other significant transactions are denominated in Canadian dollars. We do not have any material non-U.S. dollar-denominated obligations. We also face foreign currency exposure on the translation of our operations in Canada, Ireland and France from their local currencies to the U.S. dollar. Currently, we do not utilize forward contracts to hedge against foreign currency risk; however, a 10% change in foreign currency exchange rates would not have a material impact on our results of operations, financial position or cash flows.

 

The redemption of our Notes will likely result in a foreign exchange gain for Canadian income tax purposes. The amount of this gain will depend on the exchange rate between the U.S. and Canadian dollar at the time the Notes are paid. At March 19, 2007, the unrealized foreign exchange gain on the translation of the Notes to Canadian dollars for Canadian income tax purposes was approximately $141 million. If all of our outstanding Notes had been paid at March 19, 2007, one-half of this foreign exchange gain would be included in our Canadian taxable income, which would result in a corresponding reduction in our available Canadian operating losses and tax credit carryforward balances (with an offsetting reduction to the valuation allowance provided against those balances). However, the payment of our Notes will not result in a foreign exchange gain being recognized in our consolidated financial statements, as those statements are prepared in U.S. dollars.

 

Interest rate risk

 

The primary objective of our policy for the investment of cash surpluses is the protection of principal and, accordingly, we invest in investment-grade securities with varying maturities, but typically less than 90 days. As it is our intent and policy to hold these investments until maturity, we do not have a material exposure to interest rate risk.

 

We are exposed to interest rate risk on borrowings under our credit facility. This facility, which is currently undrawn, bears interest based on London Interbank Offering Rate, U.S. dollar base rate, Canadian dollar prime rate or Canadian dollar bankers’ acceptance. The imputed rates of interest used to discount our long-term obligations related to the acquisitions of intangible assets are fixed and, consequently, the fair values of these obligations are affected by changes in interest rates. The fair value of our fixed-rate Notes is also affected by changes in interest rates. Currently, we do not utilize interest rate swap contracts to hedge against interest rate risk; however, based on our overall interest rate exposure, a 10% change in interest rates would not have a material impact on our results of operations, financial position or cash flows.

 

Investment risk

 

We are exposed to investment risks on our investments in other companies. The fair values of our investments are subject to significant fluctuations due to stock market volatility and changes in general market

 

64



 

conditions. We regularly review the carrying values of our investments and record losses whenever events and circumstances indicate that there have been other-than-temporary declines in their fair values. A 10% change in the total fair values of our investments would have a material impact on our results of operations; however, it would not have a material impact on our financial position or cash flows.

 

RELATED PARTY TRANSACTIONS

 

In May 2006, we named Dr. Peter Silverstone as Senior Vice-President, Medical and Scientific Affairs. Dr. Silverstone joined Biovail from Global IQ, a clinical research organization that he co-founded in 1999, where he served as Chief Medical Officer. Global IQ has in the past provided clinical research services to Biovail, and prior to Dr. Silverstone’s joining Biovail, we had selected Global IQ as the preferred vendor for a new clinical study for a particular product. In connection with this study, Global IQ has been providing services for a long-term safety study and may provide other Phase III clinical work in the future in respect of this product. We have been invoiced a total of $2.0 million by Global IQ for this study up to and including December 31, 2006. At December 31, 2006, $220,000 of this amount remained outstanding. It is currently anticipated that the study in respect of this product will continue for a period of at least one year. While clinical research studies are within Dr. Silverstone’s area of management and control, we have taken steps to ensure that he is not involved in any financial decisions in connection with any services provided or to be provided by Global IQ. Further, we have stated that Global IQ will no longer be eligible to bid to perform services for Biovail in connection with any new clinical programs for other products until Dr. Silverstone has disposed of his interest in Global IQ to an arm’s-length party.

 

In 2006, Eugene Melnyk, Chairman of Biovail, reimbursed Biovail $420,000 for expenses incurred in connection with the analysis of a potential investment in a company that Mr. Melnyk decided to pursue personally following a determination by our Board of Directors that the investment opportunity was not, and would not in future be, of interest to Biovail.

 

PROPOSED TRANSACTION

 

On February 21, 2007, we entered into a share transfer agreement pursuant to which we have agreed to sell all or a part of our common shares of Ethypharm. Subject to certain conditions precedent being satisfied, it is anticipated that this transaction will close in April 2007. As consideration for such transfer we will receive cash in an amount to be determined at the closing date. We have agreed, upon closing, to invest a portion of the net proceeds of the sale to acquire a minority interest in the acquiring company.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Critical accounting policies and estimates are those policies and estimates that are most important and material to the preparation of our consolidated financial statements, and which require management’s most subjective and complex judgment due to the need to select policies from among alternatives available, and to make estimates about matters that are inherently uncertain. We base our estimates on historical experience and other factors that we believe to be reasonable under the circumstances. Under certain agreements, we rely on estimates made by our third-party licensees. On an ongoing basis, we review our estimates to ensure that these estimates appropriately reflect changes in our business and new information as it becomes available. If historical experience and other factors we use to make these estimates do not reasonably reflect future activity, our results of operations and financial position could be materially impacted.

 

Our critical accounting policies and estimates relate to the following:

 

                  Revenue recognition;

 

                  Useful lives and impairment of intangible assets;

 

                  Contingencies;

 

                  Income taxes; and

 

                  Stock-based compensation.

 

65



 

Revenue recognition

 

We recognize product sales revenue when title has transferred to the customer, provided that we have not retained any significant risks of ownership or future obligations with respect to the product sold. Revenue from product sales is recognized net of provisions for estimated cash discounts, allowances, returns, rebates and chargebacks, as well as distribution fees paid to certain of our wholesale customers. We establish these provisions concurrently with the recognition of product sales revenue. In connection with these provisions related to sales of our Wellbutrin XL®, Ultram® ER, Cardizem® LA, Tiazac® and Generic products in the U.S., we rely on estimates made by our licensees, GSK, OMI, Kos, Forest and Teva, respectively. Revenue from sales of those out-licensed products accounted for approximately 70% of our total gross product sales in 2006, compared with 55% in each of 2005 and 2004.

 

We continually monitor our product sales provisions and evaluate the estimates used as additional information becomes available. We make adjustments to these provisions periodically to reflect new facts and circumstances that may indicate that historical experience may not be indicative of current and/or future results. We are required to make subjective judgments based primarily on our evaluation of current market conditions and trade inventory levels related to our products. This evaluation may result in an increase or decrease in the experience rate that is applied to current and future sales, or an adjustment related to past sales, or both.

 

Continuity of product sales provisions

 

The following table presents the activity and ending balances for our product sales provisions for the last three years.

 

 

 

Cash

 

 

 

 

 

Rebates and

 

Distribution

 

 

 

 

 

Discounts

 

Allowances

 

Returns

 

Chargebacks

 

Fees

 

Total

 

 

 

($ in 000s)

 

Balance at January 1, 2004

 

$

2,014

 

$

450

 

$

43,289

 

$

21,151

 

$

 

$

66,904

 

Current year provision

 

5,797

 

3,015

 

24,896

 

30,386

 

1,319

 

65,413

 

Prior year provision

 

 

 

14,062

 

(1,479

)

 

12,583

 

Payments or credits

 

(7,022

)

(2,576

)

(51,826

)

(39,857

)

 

(101,281

)

Balance at December 31, 2004

 

789

 

889

 

30,421

 

10,201

 

1,319

 

43,619

 

Current year provision

 

6,844

 

2,549

 

23,007

 

24,232

 

6,276

 

62,908

 

Prior year provision

 

 

 

11,715

 

(1,766

)

 

9,949

 

Payments or credits

 

(7,266

)

(2,605

)

(41,938

)

(24,035

)

(2,710

)

(78,554

)

Balance at December 31, 2005

 

367

 

833

 

23,205

 

8,632

 

4,885

 

37,922

 

Current year provision

 

5,365

 

1,427

 

23,176

 

16,251

 

7,411

 

53,630

 

Prior year provision

 

 

 

(3,838

)

442

 

(1,292

)

(4,688

)

Payments or credits

 

(5,423

)

(1,919

)

(17,422

)

(18,583

)

(8,654

)

(52,001

)

Balance at December 31, 2006

 

$

309

 

$

341

 

$

25,121

 

$

6,742

 

$

2,350

 

$

34,863

 

 

Use of information from external sources

 

We use information from external sources to estimate our product sales provisions. We obtain prescription data for our products from IMS Health, an independent pharmaceutical market research firm. We use this data to identify sales trends based on prescription demand and to estimate inventory requirements. We obtain inventory data directly from our three major U.S. wholesalers, Cardinal Health, Inc. (“Cardinal”), McKesson Corporation (“McKesson”) and AmerisourceBergen Corporation (“ABC”), which together accounted for approximately two-thirds of our direct product sales in the U.S. in the past three years. The inventory data

 

66



 

received from these wholesalers excludes inventory held by customers to whom they sell. Third-party data with respect to prescription demand and inventory levels are subject to the inherent limitations of estimates that rely on information from external sources, as this information may itself rely on certain estimates, and reflect other limitations.

 

The following table indicates information about the inventories of our products owned by Cardinal, McKesson and ABC at December 31, 2006 (which excludes inventories owned by regional wholesalers, warehousing chains, and indirect customers in the U.S., and inventories owned by wholesalers and retailers in Canada). Our distribution agreements with Cardinal, McKesson and ABC limit the amount of inventory they can own to between 1/2 and 11/2 months of supply of our products. The inventory data from these wholesalers is provided to us in the aggregate rather than by specific lot number, which is the level of detail that would be required to determine the original sale date and remaining shelf life of the inventory. However, the inventory reports we receive from these wholesalers include data with respect to inventories on hand with less than 12 months remaining shelf life. As indicated in the following table, these wholesalers owned overall less than one-month of supply of our products at December 31, 2006, of which only $180,000 had less than 12 months remaining shelf life. Therefore, we believe the collection of lot information would provide limited additional benefit in estimating our product sales provisions.

 

 

 

 

 

At December 31, 2006

 

At December 31, 2005

 

 

 

 

 

 

 

 

 

Inventory With

 

 

 

 

 

Inventory With

 

 

 

 

 

 

 

 

 

Less Than

 

 

 

 

 

Less Than

 

 

 

Original

 

 

 

Months On

 

12 Months

 

 

 

Months On

 

12 Months

 

 

 

Shelf Life

 

Total

 

Hand

 

Remaining

 

Total

 

Hand

 

Remaining

 

 

 

(In Months)

 

Inventory

 

(In Months)

 

Shelf Life