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Gene Shtark

Biovail (TSE: BVF) is a pharmaceutical company that develops and markets small-molecule drugs. Biovail has a diverse drug portfolio, with six of its drugs each comprising at least 10% of its net sales. ^{[1] [2]} Since FY08, the Firm has focused mostly on the specialty CNS drug space. ^[3]

Biovail's sales grew at ~5% per year from FY04 to FY06. ^[4]. From FY06 to FY08, sales declined by 29% due to the genericization of its best-selling (FY06) drug – Wellbutrin XL. ^{[4] [5]} Subsequently, Biovail announced in FY08 that in order to avoid competition from larger pharmaceutical companies, it would only develop and acquire drugs in specialized CNS markets. ^[3] Since this announcement, Biovail has acquired Prestwick Pharmaceuticals, initiated a stepwise acquisition of Acadia pharmaceuticals, and declared that it would acquire more external technologies in FY09 and FY10. ^[3]

Sales and Net Income from FY04 to FY08^[5]

Relative to FY07, FY08 revenue declined by 10.2% to $757M mostly because of the genericization of Wellbutrin. ^[6] Due to aggressive competition on the part of generic Wellbutrin manufacturers, Biovail's Wellbutrin's sales fell by 43.1% from FY07 to FY08 ^[7] Contrary to Biovail’s revenue, the Firm’s FY08 net income increased by 2.2% to $200M. ^[8] This increase was mainly due to the recognition of $90M in deferred income tax benefits and a decrease of $87M in legal settlements.^[9]

Business Overview

Biovail Pharmaceuticals’ drug portfolio targets three general health conditions: cardiovascular disease, pain, and CNS disorders. ^[10] Within these categories, BVF specializes in the development and manufacturing of drugs, yet it leaves the marketing and distribution of certain drugs (inc. Wellbutrin) to large partners such as GlaxoSmithKline (GSK). ^[11] In FY08, Biovail announced that it would gradually assume the marketing responsibility of all of its drugs in FY09 and FY10, and in 05/09 it purchased the entire marketing rights to Wellbutrin from GSK for $510M. ^{[3] [12]}In January, 2008, Biovail announced that it will solely develop CNS drugs in the future as part of its New Strategic Focus. ^[13] As per this announcement, the Firm is in the process of converting R&D operations, acquiring CNS-focused companies, and hiring new management. ^[14][15]

Financial Discussion

Biovail sales fell by 10.2% to $757M from FY07 to FY08 largely due to the genericization and lost sales of Wellbutrin XL. ^[16] Keeping all other financial results constant, the decrease in Wellutrin XL revenue singlehandedly decreased Biovail’s revenue by 11.4%. The Firm’s net income, however, rose by 2.2% to $200M due to the exercise of $90M in deferred income tax benefits and a decrease of $87M in legal settlement fees. ^[5][9]. Following this fall in revenues and rise in net income, Biovail’s profit margin rose from 23.2% in FY07 to 26.4% in FY08. Biovail’s two largest expense categories in FY08 were Cost of Goods Sold (“COGS”) and Selling, General, & Administrating (“SG&A”), which took up 26% and 25% of its revenues, respectively. From FY07 to FY08, SG&A/Sales increased by 30.6%. This is largely a result of the firm’s boosted marketing efforts in the face of falling revenues. ^{[17] [18]} Although the Firm’s R&D expenditure rose steadily from 8.4% of sales to 12.3% of sales from FY04 to FY08, it fell to 8.3% of sales in Q1 of FY09. ^[19][2]This drop in R&D expenditure reflects Biovail’s shift from in-house R&D to acquisitions as a tool for long-term growth. ^[20]

During FY07 and FY08, Biovail maintained a relatively low debt-to-asset ratio of approximately 26% in comparison to Cephalon Pharmaceutical’s 52.6% and Pfizer’s 48.2%. ^[2] In Q1FY09, however, the Firm’s management announced that it would increase the Firm’s leverage in order to finance its ongoing spree of acquisitions. ^[21] In March, 2009, for example, the firm announced that it would fully utilize a $400M credit facility, a move that will nearly double its DTA ratio to 50.6%. ^[22]

Sales by Drug from FY06 to FY08^[1]

Operating Segments

According to its New Strategic Focus, the Firm shut down two non-CNS R&D facilities in Puerto Rico in late FY08 and announced that it would close a similar facility in Ireland. ^[14] In September, 2008, it paid $100M to acquire Prestwick Pharmaceuticals, which received FDA approval to sell Xenazine in early 2008 in addition to having three other potential CNS drugs in its pipeline. ^[23] BVF has also announced that it would acquire Acadia Pharmaceuticals using gradual payments that will depend on the progress of the Target’s drug pipeline in FDA testing. ^[24]

The following are Biovail’s most significant products in terms of existing and prospective sales. Notice that Biovail produces several drugs (inc. Wellbutrin XL and Ultram ER) that are more potent, extended-release formulations of existing drugs. Also, note that demand for several of Biovail’s drugs (inc. Wellbutrin XL, Ultram ER, Zovirax) has been decreasing due to patent expiry and increased competition.

Sales by Drug from FY06 to FY08^[1]

Zovirax – 21.2% of sales

Zovirax is an antiviral cream that is used to treat Herpes. This product accounts for 74% of all topical anti-herpes prescriptions in the US. ^[25] By raising the price of Zovirax to counteract a modest decrease in its demand, Biovail boosted its sales by 2% to $150M. ^[26]

Wellbutrin XL – 16.9% of sales

Wellbutrin is an extended-release formulation of buproprion, which is a common medication used to treat depression in adults. ^[27] The drug’s patent protection expired in 2006, and the entrance of generic competition has contributed to a 73% drop in Wellbutrin XL sales to $121M from FY06 to FY08. ^[4] Biovail is currently applying for regulatory approval of Wellbutrin XL in multiple European countries, where the Firm would face strict price ceilings despite their patent protection. ^[28]

Ultram ER – 11.5% of sales

Ultram is an extended-release formulation of an existing drug, tramadol hydrochloride, which is used to manage moderate to severe chronic pain in adults. A new once-daily formulation of Ultram will be launched in late 2009. Ultram ER’s revenues fell by 6% to $82M from FY07 to FY08 due to lowered prescription volumes. ^[29]

Xenazine – 4% of sales in Q1FY09

Xenazine is used to treat the chorea symptoms of Huntington’s disease, which include jerky, uncontrollable movements that arise due to the CNS degeneration. This drug was approved in early 2008, and BVF has been marketing it after its acquisition of Prestwick Pharmaceuticals in FY08. ^[30] Xenazine sales have grown from 0.5% of total sales in FY08 ($3.7M) to 4% of total sales in Q1FY09 (annualized $27.7M) because of increased market penetration. ^[31]

Legacy products – 21.6% of sales

Biovail has purchased the marketing rights of several branded drugs that face generic competition (i.e. Legacy products). Most of Biovail’s Legacy drugs are used to treat cardiovascular conditions and hypertension. ^[32] Legacy products’ sales are fairly consistent, and in FY08 they even rose by 12.7% to $154M despite sharp revenue declines in Biovail’s other drug units. ^{[1] [32]}

Generic products – 11.7% of sales

In its Generic division, Biovail produces exact, unbranded replications of branded drugs that are already on the market. The Firm’s differentiates itself as a generic competitor by solely manufacturing drugs that are very difficult to formulate. ^[33] The drugs’ markets, as a result, have limited entry by other competitors. The major products in Biovail’s generic portfolio include Tiazac and Cartizem. ^[33] Sales of generic drugs decreased by 4% to $83M in FY08. ^[33]

Not yet marketable – pipeline drugs

According to Biovail’s New Strategic Focus, all the drugs that the Firm plans to release over FY09-FY11 focus on CNS disorders. ^[34] These drugs include the following:
(i) BVF-045 – a combination product of Aplenzin and an unspecified selective serotonin reuptake inhibitor (SSRI) that is used to treat depression. ^[34]
(ii) BVF-324 (phase III FDA approval) –drug that is used to treat sexual dysfunction. ^[34]
(iii) Acquisitions– Biovail is in the process of acquiring the drug pipeline of Acadia Pharmaceuticals. ^[34]
(iv) Others – abbreviated new drug applications (ANDA’s) were launched in 2008 for several generic drugs. ^[34]

Geography of Operations

FY08 Breakdown of BVF’s sales by region ^[35]

Though Biovail is officially based in Canada, it generates approximately 86% of its sales in the United States. ^[35] From FY06 to FY08, however, the share of its sales coming from outside of the US has grown steadily from 9.5% to 13.3%. ^[35] Furthermore, all of Biovail’s research and development facilities are located outside of the United States. ^[36]

Trends and Forces

Biovail’s revenues decline with the genericization of its branded drugs

Patent protection for Wellbutrin XL expired in August, 2006, thus opening its market to generic competition. ^[37] Given that Wellbutrin accounted for 42% of Biovail’s total sales in FY06, its 73% drop in sales from FY06 to FY08 ($450M vs. $121M, respectively) severely decreased Biovail’s revenues. ^[38] Prior to FY06, Biovail also lost patent protection on Zovirax in FY97. ^[25] Biovail’s share in the herpes market, however, still remains very strong. ^[25] Even now, for example, branded Zovirax is prescribed in 74% of all topical anti-herpes uses in the US. ^[25]

Biovail’s current drug portfolio will face another series of patent expirations in FY2014 and FY2015. In FY2014, Biovail will lose patent protection on Ultram ER, which accounted for 11.5% of its sales in FY08. ^[39] In FY2015, Biovail will lose patent protection on Xenazine, which accounted for 4% of its sales in Q1FY09. ^[40] Since Biovail began marketing Xenazine only in mid-FY08 after its acquisition of Prestwick Pharmaceuticals, the magnitude of the drug’s sales in its portfolio is not yet readily assessable.^[6]Once Biovail loses patent protection on Ultram ER and Xenazine in FY14 and FY15, its sales will face depressive pressure from generic competition as in the cases of Wellbutrin and Zovirax.

Biovail is expanding exclusively into specialized CNS markets to avoid competition from larger firms

From 2000 to 2006, Big Pharma firms such as GlaxoSmithKline tended to focus on drug markets such as heart disease with large enough market potential. ^[41] Competitive pressure from Big Pharma, as a result, encouraged mid-sized firms to specialize in smaller markets with more limited competition. ^[41] As of 2005, CNS was the largest of these specialty markets, having an estimated market value of $11,500M (22.1% of total specialty market size). ^[41] Biovail’s strategy shift from FY06 to FY08 mirrored that of the entire pharmaceutical industry. Prior to FY06, Biovail had focused on the development of controlled-release drugs targeting cardiovascular disease, herpes, and pain. ^[3] From FY06 to FY08, however, sales of many of Biovail’s existing drugs declined by 29% due to increased branded and generic competition. ^[5] The Firm’s management, as a result, decided to switch to specialty-CNS markets in order to avoid such competitive pressure. ^[3] Biovail, in other words, acted on the belief that specialized CNS markets are small enough to discourage entry by Big Pharma. ^[42] Biovail’s switch from its traditional disease spaces to specialty CNS has been termed the “New Strategic Focus.”

After announcing the New Strategic Focus (NSF), Biovail closed down non-CNS R&D operations in Puerto Rico and announced plans to close at least one other non-CNS facility in Ireland. ^[14]. Additionally, the Firm hired personnel with experience in CNS pharmaceuticals in order to spearhead future acquisitions and in-sourcing of external technology. ^[43] These new hires coordinated the acquisition of Prestwick, the stepwise acquisition of Acadia, and the licensing negotiations with GSK over Wellbutrin XL. ^[44]

Limited productivity & pressure to enter CNS market spur Biovail to acquire smaller firms

Despite declaring in 05/08 that it would focus solely on CNS drugs, Biovail had not announced any in-house CNS discoveries since early FY08 as of Q1FY09. ^[6] Instead, it has relied exclusively on acquisitions of external technologies to establish its CNS capabilities. From FY06 to FY08, for example, Biovail spent an average of $102M per year on research and development. ^[5] In FY08 and in the first half of FY09, on the other hand, it initiated acquisitions totaling $465M (Prestwick, Acadia) and purchased the rights to market Wellbutrin from GSK for $510M. ^{[3] [45]} On a prorated basis, Biovail has devoted 3 times as much capital to acquisitions as it has to in-house R&D ($310M per year vs. $102M per year, respectively).^[5] The Firm is also in the process of paying $365M to ACADIA Pharmaceuticals (ACAD) for the rights to manufacture and market pimavanserin tartarate. This Parkinson’s and Alzheimer’s disease anti-psychosis drug is currently in Phase III Food and Drug Administration (FDA) testing, and the schedule of BVF’s future payments to Acadia will depend upon the drug’s approval progress.^[46] Finally, in 05/09, Biovail purchased 100% of the rights to market Wellbutrin XL from GlaxoSmithKline for $510M. ^[45]

In its development pipeline, Biovail only has drugs that target non-CNS diseases. ^[47] BVF-324, for example, is a sexual enhancement drug that is currently in Stage III FDA testing. ^[48] Although revenue projections for BVF-324 are not yet available, management has disclosed that the drug will have intellectual property protection until 2020. ^[49]

From FY06 to FY08, Biovail spent an average of $102M per year on research and development. ^[5] In FY08 and early FY09, on the other hand, it initiated acquisitions totaling $465M (Prestwick, Acadia) and purchased the rights to market Wellbutrin from GSK for $510M. ^{[3] [45]}

Competition

Since it makes drugs across many disease categories, BVF faces both large competitors such as GlaxoSmithKline (GSK) and Pfizer (PFE) and specialized mid-cap competitors like Forest Laboratories (FRX) and Cephalon (CEPH). Unlike BVF, Big Pharma firms usually have in-house sales teams that market and distribute their drugs. Furthermore, they have historically focused on disease categories with large market potential (e.g. cancer, heart disease). ^[55] In comparison to similar-size competitors such as Forest and Cephalon, Biovail pursued an aggressive acquisition strategy in FY08 and FY09. Furthermore, it decreased its reliance on in-house R&D in favor of in-sourcing other firms’ technologies. ^[20] In comparison to Forest’s 16.9% R&D to sales ratio, for example, Biovail only earmarks 8.6% of its revenues to R&D. ^[56]

• Forest Laboratories (FRX) produces Lexapro – a selective serotonin reuptake inhibitor (SSRI) that is used to treat depression. ^[57] Lexapro therefore competes directly with Biovail’s Wellbutrin XL.
• Cephalon (CEPH) is a pharmaceutical company that specializes in specialty CNS and pain medicine. ^[58] Cephalon’s Pentora is used to treat excessive pain, for example, and it is especially useful in the case of cancer patients. ^[58] Pentora thus competes with Ultram ER in the pain drug category.
• GlaxoSmithKline (GSK) makes Valtrex– a herpes treatment that competes directly with Zovirax. ^[59] Since GSK is much larger than Biovail (sales = $25,452M), however, it also has a more diverse drug portfolio. ^[60]
• Pfizer (PFE) is a very large firm (sales = $48,296M) that competes with Biovail in several product markets. Pfizer’s Zoloft, for example, is an anti-depression drug in the same market as Biovail’s Wellbutrin.

References

1. ↑ ^{1.0 1.1 1.2 1.3} BVF 2008 20-F, page 73
2. ↑ ^{2.0 2.1 2.2} BVF 2008 20-F P. F-5
3. ↑ ^{3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7} BVF 2008 20-F P. 27
4. ↑ ^{4.0 4.1 4.2} Generic Wellbutrin XL
5. ↑ ^{5.0 5.1 5.2 5.3 5.4 5.5 5.6} BVF 2008 20-F, page F-6
6. ↑ ^{6.0 6.1 6.2} Biovail, “Income Statement”
7. ↑ BVF Q1 FY09 6-K p. 35
8. ↑ BVF 2008 20-F, page 71
9. ↑ ^{9.0 9.1} BVF 2008 20-F, page 85
10. ↑ BVF 2008 20-F p. 30
11. ↑ BVF 2008 20-F, page 31
12. ↑ News/2311013/?relatestories=1Biovail purchases marketing rights of Wellbutrin
13. ↑ BVF 2008 20-F p. 46
14. ↑ ^{14.0 14.1 14.2} BVF 2008 20-F p. 48
15. ↑ BVF Q1 FY09 6-K p. 28
16. ↑ BVF 2008 20-F P. F-6
17. ↑ BVF 2008 20-F page F-14
18. ↑ BVF Q1 FY09 6-K p. 59
19. ↑ BVF Q1 FY09 6-K p. 28
20. ↑ ^{20.0 20.1} BVF Q1 FY09 6-K p. 38
21. ↑ BVF Q1 FY09 6-K p.45
22. ↑ BVF 2008 20-F, page 78
23. ↑ BVF 2008 20-F p. 46
24. ↑ BVF Q1 FY09 6-K p. 46
25. ↑ ^{25.0 25.1 25.2 25.3} BVF 2008 20-F p. 30
26. ↑ BVF 2008 20-F p.74
27. ↑ Bupropion Against Depression
28. ↑ BVF 2008 20-F p. 31
29. ↑ BVF 2008 20-F p. 31
30. ↑ BVF 2008 20-F p. 46
31. ↑ BVF 2008 20-F p.35
32. ↑ ^{32.0 32.1} BVF 2008 20-F p. 75
33. ↑ ^{33.0 33.1 33.2} BVF 2008 20-F p.35
34. ↑ ^{34.0 34.1 34.2 34.3 34.4} BVF 2008 20-F p.36
35. ↑ ^{35.0 35.1 35.2} BVF 2008 20-F p. 29
36. ↑ BVF 2008 20-F p. 48
37. ↑ Comments on Wellbutrin XL(R) Court Ruling-a0148968659 Wellbutrin Genericization 8/1/2006
38. ↑ BVF 2008 20-F, page 73
39. ↑ Ultram Patent Expiration
40. ↑ Xenazine Patent Expiration
41. ↑ ^{41.0 41.1 41.2} Competitive pressure forces pharmaceutical firms to specialize
42. ↑ BVF 2008 20-F P. 24
43. ↑ BVF 2008 20-F P.26
44. ↑ BVF 2008 20-F p.25
45. ↑ ^{45.0 45.1 45.2} Biovail purchases the rights to market Wellbutrin
46. ↑ BVF Q1 FY09 6-K p. 28
47. ↑ BVF 2008 20-F, page 36
48. ↑ Viagra-like drug to treat sexual dysfunction
49. ↑ Biovail Corporation Enters Into License and Development Agreement for Exclusive Global Rights to BVF-324
50. ↑ Biovail FY08 Income Statement
51. ↑ Forest FY08 Income Statement
52. ↑ Cephalon FY08 Income Statement
53. ↑ GlaxoSmithKline Income Statement
54. ↑ Pfizer FY08 Income Statement
55. ↑ BVF 2009 p.24
56. ↑ “Forest Pharmaceuticals Income Statement
57. ↑ “Forest Pharmaceuticals” 5/12/2009
58. ↑ ^{58.0 58.1} CEPH 2008 10-K p. 11
59. ↑ Paxil competes directly with Wellbutrin
60. ↑ GlaxoSmithKline FY08 Income Statement