Biovail merger doomed, founder says

A deal that sees Canadian drug maker Biovail Corp. merge with California-based Valeant Pharmaceuticals International is "doomed to fail" under a huge debt load, Biovail founder Eugene Melnyk says.

Shareholders of the two companies approved the merger in separate votes earlier Monday. Biovail's shares which rose in the months ahead of the vote, were down 1.9 per cent at $27.32 on the Toronto Stock Exchange.

Biovail, Canada's largest publicly traded drug maker, said 99.9 percent of votes cast at the special meeting of shareholders in Toronto were in favour of the deal.

"At the end of the day, this is a tragedy and a travesty," Melnyk told CBC.

Melnyk, who founded the company more than 20 years ago and saw it grow to a market capitalization of $7.5 billion US before jettisoning most of his shares earlier this year, is concerned about the huge amount of debt thatwas required to complete the deal.

Bloomberg News reported last week that theterms include a loan of between $950 million USand $1 billion due in 2015 and another loan totalling between $625 millionand $675 million. Valeant is also seeking a $175 million revolving line of credit.

The total value of the merger is about $3.2 billion US.

"It is doomed to fail in two or three years," he said. "They won't be able to pay back the debt."

Job losses

Melnyk warned Sunday in a letter to both companies that the deal was bad for taxpayers and shareholders and would also result in job losses.

The new company said it plannedto slash 1,100 jobs, or 25 per cent of the combined workforce in a bid to cut costs.

"The job losses that will occur are just unconscionable and all are centered around trying to avoid tax and making a financially engineered deal that has nothing to do with running a pharmaceutical company," he said.

Two California lawmakers also expressed concern about the deal last week and asked the U.S. Securities and Exchange Commission and the Department of Justice to investigate.

The California Assembly members raised concerns about the company'sattempt to avoid paying taxes as well as theimpendingjob losses in their state.

At odds

Melnyk, the millionaire owner of the Ottawa Senators National Hockey League team and a stable of expensive racehorses, stepped down as executive chairman of Biovail in 2007.

Since then he has been at odds with the company after it unveiled its new strategic direction into treatments for diseases of the central nervous system.

He said the merger with Valeant was a poor attempt by Biovail tomask that the change in strategy was not working.

"The only way to bail and save face is to do a very complex financial transaction," he said. "This deal may get through and it may close, but I would hate to be holding that paper (the debt) four years from now."

This wasn't the first time Melnyk has butted heads with the company.

In 2008, he called for a special shareholders meeting to vote on two board nominees backed by him, and on changes to the company's governance, before reaching an agreement.

Competing interests

Although he stepped away from Biovail, Melnyk has not completely left the pharmaceutical industry.

He now focuses his attentionon his privately held drug delivery company, Trimel BioPharma, and on Fusion Brands, a dermatology, cosmetics and biological sciences firm.

Trimel, which he formed in 2008, has a number of products under development, with two products expected to be in late-stage trials by the spring of 2011. At least one regulatory filing is expected by the end of the same year.

Melnyk still faces regulatory issues in Canada surrounding his involvement in Biovail's accounting and disclosure practices, dating back to 2001.