UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15d -16 OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
COMMISSION FILE NUMBER 001-11145
BIOVAIL CORPORATION
(TRANSLATION OF REGISTRANT'S NAME INTO ENGLISH)
2488 DUNWIN DRIVE, MISSISSAUGA, ONTARIO, L5L 1J9, CANADA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (416) 285-6000
INDICATE BY CHECK MARK WHETHER THE REGISTRANT FILES OR WILL FILE ANNUAL REPORTS
UNDER COVER OF FORM 20-F OR FORM 40-F.
FORM 20-F /X/ FORM 40-F / /
INDICATE BY CHECK MARK WHETHER THE REGISTRANT BY FURNISHING THE INFORMATION
CONTAINED IN THIS FORM IS ALSO THEREBY FURNISHING THE INFORMATION TO THE
COMMISSION PURSUANT TO RULE 12g 3-2(b) UNDER THE SECURITIES EXCHANGE ACT OF
1934.
YES / / NO /X/
BIOVAIL CORPORATION
QUARTERLY REPORT
THIS REPORT OF FOREIGN ISSUER ON FORM 6-K IS INCORPORATED BY REFERENCES INTO THE
REGISTRATION STATEMENTS ON FORM S-8 (REGISTRATION NO. 333-92229) AND ON FORM
F-10 (REGISTRATION NOS. 333-10860 AND 333-14048) OF BIOVAIL CORPORATION.
INDEX
PART I - FINANCIAL INFORMATION
Financial Statements
Consolidated Balance Sheets as at September 30, 2001 and December
31, 2000...............................................................2
Consolidated Statements of Income for the three months and nine months
ended September 30, 2001 and 2000......................................3
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2001 and 2000............................................4
Condensed Notes to the Consolidated Financial Statements..................5
Management's Discussion and Analysis of Financial Condition and Results
of Operations.................................................................15
Quantitative and Qualitative Disclosure about Market Risk.....................22
PART II - OTHER INFORMATION
Operational Information.......................................................24
Legal Proceedings.............................................................24
Material Issued to Shareholders...............................................24
As used in this report, unless the context otherwise indicates, the terms "we",
"us", "our" and similar terms as well as references to "Biovail" or the
"Company", means Biovail Corporation.
All dollar amounts in this report are expressed in U.S. dollars.
1
BIOVAIL CORPORATION
CONSOLIDATED BALANCE SHEETS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(All dollar amounts are expressed in thousands of U.S. dollars)
SEPTEMBER 30 December 31
2001 2000
(UNAUDITED) (Audited)
------------ -----------
ASSETS
CURRENT
Cash and cash equivalants $ 27,769 $ 125,144
Accounts receivable [NOTE 3] 119,409 105,850
Inventories [NOTE 4] 40,878 24,108
Deposits and prepaid expenses 5,617 5,347
------------ -----------
193,673 260,449
Long-term investments 1,593 1,561
Property, plant and equipment, net 81,758 52,541
Goodwill, net 97,849 103,105
Intangible assets, net [NOTE 5] 647,653 667,431
Other assets, net 14,338 22,180
------------ -----------
$ 1,036,864 $ 1,107,267
============ ===========
LIABILITIES
CURRENT
Accounts payable $ 23,981 $ 34,683
Accrued liabilities 96,822 35,452
Income taxes payable 13,434 6,711
Deferred revenue 23,775 26,334
Current portion of long-term obligations [NOTE 6] 54,640 182,564
------------ -----------
212,652 285,744
Deferred revenue 24,300 27,900
Long-term obligations [NOTE 6] 214,814 256,180
Convertible Subordinated Preferred Equivalent Debentures
[NOTES 7 AND 15] 134,515 299,985
------------ -----------
586,281 869,809
------------ -----------
SHAREHOLDERS' EQUITY
Common shares, no par value, unlimited shares authorized,
138,783,811 and 131,461,060 issued and outstanding at
September 30, 2001 and December 31, 2000, respectively [NOTE 8] 698,862 482,842
Stock options outstanding 9,823 9,891
Warrants [NOTE 9] 6,246 7,912
Deficit [NOTE 8] (261,082) (261,819)
Accumulated other comprehensive loss (3,266) (1,368)
------------ -----------
450,583 237,458
------------ -----------
$ 1,036,864 $ 1,107,267
============ ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
2
BIOVAIL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(All dollar amounts are expressed in thousands of U.S. dollars)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------- ---------------------------
2001 2000 2001 2000
------------- ------------- ------------- ------------
REVENUE
Product sales $ 137,147 $ 53,318 $ 374,472 $ 134,555
Research and development 6,588 34,434 10,117 62,730
Royalty and licensing 8,455 5,663 20,332 12,076
------------- ------------- ------------- ------------
152,190 93,415 404,921 209,361
------------- ------------- ------------- ------------
EXPENSES
Cost of goods sold 36,621 16,786 90,283 41,333
Research and development 12,018 22,392 36,863 47,457
Selling, general and administrative 26,422 13,162 77,675 38,196
Amortization 11,107 1,022 32,558 3,049
Acquired research and development - 141,500 - 141,500
------------- ------------- ------------- ------------
86,168 194,862 237,379 271,535
------------- ------------- ------------- ------------
Operating income (loss) 66,022 (101,447) 167,542 (62,174)
Interest income (expense), net (6,465) 3,102 (28,656) 5,219
Debt conversion premium [NOTE 7] (22,731) - (22,731) -
------------- ------------- ------------- ------------
Income (loss) before income taxes 36,826 (98,345) 116,155 (56,955)
Provision for income taxes 3,725 2,478 9,785 4,735
------------- ------------- ------------- ------------
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle 33,101 (100,823) 106,370 (61,690)
Extraordinary item - - - (20,039)
------------- ------------- ------------- ------------
Income (loss) before cumulative effect of change in
accounting principle 33,101 (100,823) 106,370 (81,729)
Cumulative effect of change in accounting principle - - - (43,500)
------------- ------------- ------------- ------------
NET INCOME (LOSS) $ 33,101 $ (100,823) $ 106,370 $ (125,229)
============= ============= ============= ============
BASIC EARNINGS (LOSS) PER SHARE [NOTE 10]
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle $ 0.24 $ (0.78) $ 0.80 $ (0.48)
Extraordinary item - - - (0.16)
Cumulative effect of change in accounting principle - - - (0.34)
------------- ------------- ------------- ------------
Net income (loss) $ 0.24 $ (0.78) $ 0.80 $ (0.98)
============= ============= ============= ============
DILUTED EARNINGS (LOSS) PER SHARE [NOTE 10]
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle $ 0.22 $ (0.78) $ 0.71 $ (0.48)
Extraordinary item - - - (0.16)
Cumulative effect of change in accounting principle - - - (0.34)
------------- ------------- ------------- ------------
Net income (loss) $ 0.22 $ (0.78) $ 0.71 $ (0.98)
============= ============= ============= ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (000s) [NOTE 10]
Basic 137,011 129,739 133,713 128,285
============= ============= ============= ============
Diluted 152,428 146,377 149,308 143,402
============= ============= ============= ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
3
BIOVAIL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(All dollar amounts are expressed in thousands of U.S. dollars)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------
2001 2000
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 106,370 $ (125,229)
Depreciation and amortization 41,730 14,926
Amortization of discount on long-term obligations 9,467 -
Debt conversion premium [NOTE 7] 22,731 -
Interest paid through the issuance of common shares [NOTE 7] 1,238 -
Deferred income taxes 1,450 -
Compensation cost for employee stock options 1,499 -
Acquired research and development - 141,500
Extraordinary item - 20,039
Cumulative effect of change in accounting principle - 43,500
------------- -------------
184,485 94,736
Change in non-cash operating items [NOTE 12] (16,350) (48,529)
------------- -------------
CASH PROVIDED BY OPERATING ACTIVITIES 168,135 46,207
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment, net (37,851) (11,074)
Additions to intangible assets (27,767) -
Reduction in intangible assets 14,748 333
Acquisition of long-term investments (238) (2,273)
Investment in IPL Acquireco 2000 Ltd. - (141,500)
Maturity of short-term investments, net - 16,725
Proceeds from sale of assets held for disposal - 20,000
------------- -------------
CASH USED IN INVESTING ACTIVITIES (51,108) (117,789)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common shares 14,913 104,093
Repurchase of common shares [NOTE 8] (78,715) -
Proceeds from the exercise of warrants [NOTE 9] 28,648 -
Repayments under revolving term credit facility, net (32,320) -
Repayments of other long-term obligations (146,866) (11,432)
Issuance of Convertible Subordinated Preferred Equivalent
Debentures, net of financing costs - 288,500
Repurchase of U.S. Dollar Senior Notes - (141,017)
Collection of warrant subscription receivable - 2,287
------------- -------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (214,340) 242,431
------------- -------------
Effect of exchange rate changes on cash and cash equivalents (62) (233)
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (97,375) 170,616
Cash and cash equivalents, beginning of period 125,144 178,086
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 27,769 $ 348,702
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
4
BIOVAIL CORPORATION
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(Tabular amounts except per share data are expressed in thousands of
U.S. dollars)
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by the Company in U.S. dollars and in accordance with U.S.
generally accepted accounting principles. The interim financial
statements have been prepared using accounting policies that are
consistent with policies used in preparing the fiscal year 2000 annual
consolidated financial statements. Accordingly, these unaudited
condensed notes to the consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and
notes thereto contained in the Company's Annual Report on Form 20-F for
the fiscal year ended December 31, 2000. Certain of the prior year's
interim figures have been reclassified to conform to the current
interim period's presentation.
In preparing the Company's consolidated financial statements,
management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from these estimates and
the operating results for the interim periods presented are not
necessarily indicative of the results expected for the full year.
2. CHANGES IN ACCOUNTING PRINCIPLES
REVENUE RECOGNITION
Non-refundable, up-front fees for access to the Company's proprietary
technology in connection with certain research and development
arrangements are deferred and recognized as revenue on a straight-line
basis over the term of the relevant arrangement. License revenue is
deferred and recognized on a straight-line basis over the license
period. If there are future performance obligations of the Company, or
contingent future events relating to the amounts received or receivable
under license agreements, revenue attributable to these obligations or
future events is deferred and recognized upon the completion of the
specific event.
In the fourth quarter of 2000, the Company implemented the provisions
of the U.S. Securities and Exchange Commission's, Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements", retroactively to January 1, 2000. Accordingly, the Company
changed its method of accounting to that described above for up-front
research and development, product license and certain other fees. The
Company historically recognized these fees as revenue when all the
conditions to payment had been met, and there were no further
performance contingencies or conditions to the Company's receipt of
payment. These fees were not creditable against future payments. At
January 1, 2000, the cumulative effect of the change in accounting
principle on prior years resulted in a charge of $43,500,000, which is
included in the net loss for the nine months ended September 30, 2000.
The related deferred revenue recognized for the three months ended
September 30, 2001 and 2000 was $1,575,000 and $1,825,000,
respectively, and for the nine months ended September 30, 2001 and 2000
was $4,725,000 and $5,475,000, respectively.
NEW ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations",
and SFAS No. 142, "Goodwill and Other Intangible Assets", effective for
fiscal years beginning after December 15, 2001. Under SFAS
5
No. 141, all business combinations occurring after June 30, 2001 are to
be accounted for under the purchase method of accounting. Under SFAS
No. 142, goodwill and other intangible assets deemed to have indefinite
lives will no longer be amortized, but will be subject to annual
impairment tests. Other intangible assets will continue to be amortized
over their estimated useful lives.
The Company will adopt SFAS No. 142 as of January 1, 2002 as required.
The Company will perform the first of the required impairment tests of
goodwill and indefinite lived intangible assets as of January 1, 2002.
Any impairment loss for goodwill and indefinite lived intangible assets
arising from the initial application of SFAS No. 142 is to be reported
as resulting from a change in accounting principle. The Company has not
yet determined what the effect of adopting the provisions of SFAS No.
142 will be on the Company's financial position or results of
operations.
3. ACCOUNTS RECEIVABLE
SEPTEMBER 30 December 31
2001 2000
--------- ---------
Trade $ 110,447 $ 98,442
Royalties 5,515 3,565
Other 3,447 3,843
--------- ---------
$ 119,409 $ 105,850
========= =========
4. INVENTORIES
SEPTEMBER 30 December 31
2001 2000
--------- ---------
Raw materials $ 10,016 $ 7,140
Work in process 10,710 5,079
Finished goods 20,152 11,889
--------- ---------
$ 40,878 $ 24,108
========= =========
5. INTANGIBLE ASSETS
SEPTEMBER 30 December 31
2001 2000
--------- ---------
Workforce $ 7,241 $ 7,241
Core technology 11,185 11,185
Brand names, product rights, royalty interests and patents 668,805 662,096
--------- ---------
687,231 680,522
Less accumulated amortization 39,578 13,091
--------- ---------
$ 647,653 $ 667,431
========= =========
Amortization expense amounted to $10,059,000 and $2,114,000 for the
three months ended September 30, 2001 and 2000, respectively, and
$29,412,000 and $6,845,000 for the nine months ended September 30, 2001
and 2000, respectively.
6
6. LONG-TERM OBLIGATIONS
SEPTEMBER 30 December 31
2001 2000
------------ -----------
Revolving term credit facility $178,979 $210,000
Elan obligation 41,868 58,090
Aventis obligation 41,727 161,828
Deferred compensation 6,880 8,311
Non-interest bearing government loan -- 470
Other debt -- 45
-------- --------
269,454 438,744
Less current portion 54,640 182,564
-------- --------
$214,814 $256,180
======== ========
In June 2001, the Company's revolving term Senior Secured Credit
Facility was syndicated and the Company's available line of credit
under the facility was increased to $400,000,000. All other material
terms and conditions are unchanged.
7. CONVERTIBLE SUBORDINATED PREFERRED EQUIVALENT DEBENTURES
During August 2001, the Company entered into privately negotiated
agreements with certain holders of its outstanding 6.75% Convertible
Subordinated Preferred Equivalent Debentures, due March 31, 2025
("Debentures"). These agreements provided for the issuance of 5,982,541
common shares to those certain Debenture holders upon their surrender
of $165,470,000 aggregate principal amount of outstanding Debentures.
For the three months ended September 30, 2001, the Company recorded a
charge to income of $22,731,000, which represented the market value of
the additional shares issued in excess of the number of shares which
would have been issued under the terms of the conversion ratio provided
for in the indenture governing the Debentures.
The Company recorded an increase to common shares of $183,581,000,
which included the charge to income combined with the carrying value of
the Debentures on the date of surrender of $160,850,000. The carrying
value of the Debentures was comprised of the aggregate principle amount
of the Debentures and the unpaid accrued interest to the date of
surrender of $1,238,000, reduced by the proportionate unamortized
deferred financing costs related to the Debentures of $5,858,000.
Following the surrender of Debentures described above, $134,515,000
aggregate principal amount of Debentures remained outstanding at
September 30, 2001.
7
8. COMMON SHARES
The details of issued and outstanding common shares were as follows
(number of common shares in thousands):
NINE MONTHS ENDED Year Ended
SEPTEMBER 30, 2001 December 31, 2000
---------------------------- -----------------------------
NUMBER OF Number of
SHARES AMOUNT Shares Amount
------------- ------------- ------------- -------------
Balance, beginning of period 131,461 $ 482,842 124,392 $ 363,579
Issued on exercise of options 1,189 16,200 2,436 17,027
Issued under Employee Stock Purchase Plan 7 279 5 150
Issued on surrender of Debentures 5,983 183,581 - 15
Issued on exercise of warrants 3,015 30,314 601 6,342
Cancelled under repurchase program (2,871) (14,354)
Issued pursuant to equity offering - - 4,000 101,125
Issue costs - - - (5,782)
Additional shares issued on acquisition of
Fuisz Technologies Ltd. - - 27 386
------------- ------------- ------------- -------------
Balance, end of period 138,784 $ 698,862 131,461 $ 482,842
============= ============= ============= =============
By resolution of the Board of Directors dated September 17, 2001 the
Company implemented a common share repurchase program pursuant to which
the Company was able to repurchase up to $120,000,000 of its issued and
outstanding common shares. Prior to September 30, 2001, 2,871,200
common shares had been repurchased under this program, through open
market transactions on the New York Stock Exchange, at an average
purchase price of $41.79 for total consideration of $119,987,000. At
September 30, 2001, the Company had settled $78,715,000 of these
transactions and had accrued $41,272,000 for the remainder. The excess
of the cost of the common shares acquired over the stated capital
thereof, totaling $105,633,000 was charged to the deficit.
The number of common shares outstanding at September 30, 2001 and
December 31, 2000 were 138,783,811 and 131,461,060, respectively. The
number of stock options outstanding at September 30, 2001 and December
31, 2000 were 8,489,262 and 10,049,248, respectively.
9. WARRANTS
For the nine months ended September 30, 2001, the Company issued 6,800
common shares, for proceeds of $68,000, on the exercise of 1,700
warrants. For the nine months ended September 30, 2000, no warrants
were exercised.
In addition, during August 2001 the Company entered into privately
negotiated agreements with certain holders of its outstanding warrants.
These agreements provided for the exercise of 752,100 warrants to
purchase 3,008,400 common shares. Each warrant entitled the holder to
purchase four post-split common shares of the Company at an exercise
price of $10.00 per share. As an inducement to those certain warrant
holders to exercise, the Company paid such warrant holders $2.00 per
warrant exercised. In aggregate, the Company received proceeds of
$28,580,000 net of the inducement cost of $1,504,000.
Following the exercises of warrants described above, 2,833,450 warrants
to purchase 11,333,800 common shares remain outstanding.
8
10. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is determined in accordance with SFAS No.
128, "Earnings Per Share". Earnings (loss) per share is based on net
income (loss). Basic earnings per share is computed using the weighted
average number of common shares outstanding during the reporting
period. Diluted earnings (loss) per share is computed after giving
effect to the potentially dilutive warrants, stock options and
convertible securities. The computation of basic and diluted earnings
(loss) per share was as follows (number of common shares in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- -----------------------
2001 2000 2001 2000
--------- --------- --------- -----------
BASIC EARNINGS (LOSS) PER SHARE
Net income (loss) $ 33,101 $(100,823) $ 106,370 $ (125,229)
Weighted average number of common
shares outstanding 137,011 129,739 133,713 128,285
--------- --------- --------- -----------
Basic earnings (loss) per share $ 0.24 $ (0.78) $ 0.80 $ (0.98)
========= ========= ========= ===========
DILUTED EARNINGS (LOSS) PER SHARE
Net income (loss) $ 33,101 $(100,823) $ 106,370 $ (125,229)
Weighted average number of common
shares outstanding 137,011 129,739 133,713 128,285
Dilutive effect of warrants and stock
options 15,417 -- 15,595 --
--------- --------- --------- -----------
Adjusted weighted average number of
common shares outstanding 152,428 129,739 149,308 128,285
--------- --------- --------- -----------
Diluted earnings (loss) per share $ 0.22 $ (0.78) $ 0.71 $ (0.98)
========= ========= ========= ===========
For the three months and nine months ended September 30, 2000, all
warrants and stock options were excluded for the calculation of diluted
loss per share because the effect would have been anti-dilutive. For
all period presented, the potential dilutive effect of warrants and
stock options on the weighted average number of common shares
outstanding was as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ -----------------
2001 2000 2001 2000
------- ------- ------- -------
Weighted average number of common
shares outstanding 137,011 129,739 133,713 128,285
Dilutive effect of warrants 10,073 10,438 10,492 9,620
Dilutive effect of stock options 5,344 6,200 5,103 5,497
------- ------- ------- -------
Adjusted weighted average number of
common shares outstanding 152,428 146,377 149,308 143,402
======= ======= ======= =======
For all periods presented, the Debentures have been excluded from the
calculation of diluted earnings (loss) per share because the effect
would have been anti-dilutive.
9
11. COMPREHENSIVE INCOME (LOSS)
Pursuant to the requirements of SFAS No. 130 "Reporting Comprehensive
Income", which established standards for the reporting of comprehensive
income and its components, the following disclosure is provided:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net income (loss) $ 33,101 $(100,823) $ 106,370 $(125,229)
--------- --------- --------- ---------
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustment (1,444) (357) (1,692) (1,886)
Unrealized holding gain (loss) on
long-term investments (848) 429 (206) (214)
--------- --------- --------- ---------
Other comprehensive income (loss) (2,292) 72 (1,898) (2,100)
--------- --------- --------- ---------
Comprehensive income (loss) $ 30,809 $(100,751) $ 104,472 $(127,329)
========= ========= ========= =========
12. CHANGE IN NON-CASH OPERATING ITEMS
NINE MONTHS ENDED
SEPTEMBER 30
--------------------
2001 2000
--------- --------
Accounts receivable (13,523) (26,361)
Inventories (16,725) (10,975)
Deposits and prepaid expenses (270) (1,783)
Accounts payable and accrued liabilities 13,587 (12,714)
Income taxes payable 6,740 3,274
Deferred revenue (6,159) 30
-------- --------
$(16,350) $(48,529)
======== ========
13. LEGAL PROCEEDINGS
From time to time, the Company becomes involved in various legal
proceedings which it considers to be in the ordinary course of
business. The vast majority of these proceedings involve intellectual
property issues that often result in patent infringement suits brought
by patent holders upon the filing of ANDA applications. The timing of
these actions is mandated by statute and may result in a delay of FDA
approval for such filed ANDAs until the final resolution of such
actions or the expiry of 30 months, whichever occurs earlier.
The Company has recently commenced an action against Eli Lilly and
Company ("Lilly") in which Biovail is seeking substantial damages as a
result of Lilly's voluntary recall of Biovail's product Keftab. Lilly
is under contract with Biovail to manufacture and supply the product to
Biovail for marketing in the United States. Lilly has forced a recall
of the product because of its manufacturing issues in supplying a
stable product. Biovail believes its claims against Lilly for damages
it has suffered as a result of the Keftab recall are meritorious and is
proceeding in its legal action with dispatch.
The Company has been sued in separate lawsuits by Bayer AG and Bayer
Corporation (collectively "Bayer"), as well as by Pfizer Inc.
("Pfizer"), upon the filing by Biovail of separate ANDAs for generic
versions of Procardia XL and Adalat CC. These actions make the usual,
technical claims of infringement. Biovail is vigorously defending these
suits and is aggressively pursuing motions for summary judgment.
Biovail has denied the allegations and has pleaded affirmative defenses
that the patents are invalid, have not been infringed and are
unenforceable.
10
On April 23, 1998, Biovail filed a four-count complaint against Bayer
and Pfizer seeking a declaratory judgment that their patent is invalid,
unenforceable, and not infringed by our filing of the ANDAs. Biovail
has also asserted that Bayer and Pfizer have violated anti-trust laws
and have interfered with Biovail's prospective economic advantage.
Biovail's action has been stayed until the conclusion of the patent
infringement suits.
On or about February 15, 2001, Andrx Pharmaceuticals, Inc. ("Andrx")
commenced action against Biovail in which Andrx alleged that Biovail
had improperly listed a patent (No. 6,162,463) in the FDA's "Orange
Book" and sought declaratory and injunctive relief including a
de-listing of the patent, and alleged further that in listing such
patent, Biovail had violated certain statutes and the common law.
Andrx' motion for injunctive relief was denied. Biovail is asserting
defenses which it believes are meritorious.
Biovail has launched a patent infringement action against Andrx in
which Biovail has claimed that Andrx' product infringes Biovail's `463
Patent. This action is proceeding with dispatch.
In February 2001, Biovail commenced an action against Mylan
Pharmaceuticals, Inc. ("Mylan") and Pfizer claiming damages resulting
from an agreement between Mylan and Pfizer that had the effect of
blocking the timely marketing of Biovail's generic version of Pfizer's
30 mg Procardia XL. Biovail's action alleges that in entering into, and
implementing, such agreement Mylan and Pfizer contravened various
statutory provisions. While Biovail believes its action is meritorious,
nevertheless, it is not possible at this early stage, to determine the
quantum of damages that may be the subject of an award.
On or about February 13, 2001, Mylan brought an action against the FDA
alleging that the FDA had improperly granted to Biovail approval of its
generic version of Pfizer's 30 mg Procardia XL and sought injunctive
relief compelling the FDA to withdraw such approval. Biovail and its
marketing partner, Teva Pharmaceuticals, Inc. intervened. The court has
denied Mylan's application for injunctive relief. Biovail believes that
Mylan's action is without merit and that the FDA acted properly in
approving Biovail's product.
Very recently, a Class Action Complaint was filed against the Company
by Twin Cities Bakery Workers Health and Welfare Fund, in which the
Plaintiff has alleged that the Company has improperly impeded the
approval of a generic form of Tiazac. The Company has not yet filed an
Answer but it believes that the Complaint is totally without merit and
that the Company's actions are in accord with its rights as contained
in the Hatch-Waxman Amendments and the law. The Company will be
vigorously defending this action.
The Company is aware of the Federal Trade Commission ("FTC")
investigations relating to the introduction of generic products
generally, and with respect to Biovail's Tiazac and generic Adalat CC
products specifically. Biovail is engaged in currently providing
information to the FTC that the Company believes will clearly
demonstrate that its actions have been proper and in compliance with
the law.
Biovail has commenced an action against Mylan with respect to Mylan's
breach of contract relating to its supply product obligations to the
Company. While the action is in its early stages, Biovail believes that
it has a meritorious action and that it will recover damages.
Recently, a Certificate of Non-Infringement was served by Torpharm,
Inc. ("Torpharm") on Aventis Pharmaceuticals Inc. ("Aventis") in
respect of its filed ANDA of a generic version of Cardizem(R) CD
(120mg, 180mg and 300mg) with the FDA. The patents against which
Torpharm certified were acquired by Biovail Laboratories Incorporated
("BLI") as part of BLI's acquisition of the Cardizem(R) family of
products. BLI is currently evaluating Torpharm's certification. Should
BLI determine that Torpharm's ANDA infringes BLI's patents, a legal
suit will be commenced against Torpharm on or before November 23, 2001,
the effect of which will be to trigger the Hatch-Waxman provisions. As
a result, the FDA would be statutorily and automatically precluded from
granting approval to Torpharm until the earlier of 30 months after the
filing of the legal suit, a final court decision of non-infringement or
patent invalidity or a court's decision to abbreviate the 30-month
stay.
11
14. SEGMENTED INFORMATION
Organizationally, the Company's operations consist of three segments -
Product Sales, Research and Development, and Royalty and Licensing. The
segments are determined based on several factors including customer
base, the nature of the product or service provided, delivery channels
and other factors.
The PRODUCT SALES segment covers sales of production from the Company's
Puerto Rican and Canadian facilities, sales of proprietary and
in-licensed branded products by the Company's sales and marketing
operations, and revenue derived from product co-promotion.
The RESEARCH AND DEVELOPMENT segment covers all revenues generated by
the Company's integrated research and development facilities, and
comprises research and development services provided to third parties,
including Intelligent Polymers Limited prior to September 29, 2000, and
product development milestone fees.
The ROYALTY AND LICENSING segment covers royalty revenues received from
licensees in respect of products for which the Company has
manufacturing, marketing and/or intellectual property rights.
INFORMATION BY REPORTABLE SEGMENTS
THREE MONTHS ENDED PRODUCT RESEARCH AND ROYALTY AND
SEPTEMBER 30, 2001 SALES DEVELOPMENT LICENSING TOTAL
------------------------------- ---------- ------------ ----------- ---------
Revenue from external
customers $ 137,147 $ 6,588 $ 8,455 $ 152,190
--------- --------- --------- ---------
Segment operating income (loss) 67,943 (7,246) 8,436 69,133
UNALLOCATED AMOUNTS
Selling, general and
administrative expenses (3,111)
Interest expense, net (6,465)
Debt conversion premium (22,731)
---------
Income before income taxes $ 36,826
=========
THREE MONTHS ENDED PRODUCT RESEARCH AND ROYALTY AND
SEPTEMBER 30, 2000 SALES DEVELOPMENT LICENSING TOTAL
------------------------------- ---------- ------------ ----------- ---------
Revenue from external
customers $ 53,318 $ 34,434 $ 5,663 $ 93,415
--------- --------- --------- ---------
Segment operating income (loss) 30,304 (130,957) 5,436 (95,217)
UNALLOCATED AMOUNTS
Selling, general and
administrative expenses (6,230)
Interest income, net 3,102
---------
Loss before income taxes $ (98,345)
=========
12
NINE MONTHS ENDED PRODUCT RESEARCH AND ROYALTY AND
SEPTEMBER 30, 2001 SALES DEVELOPMENT LICENSING TOTAL
------------------------------- ---------- ------------ ----------- ---------
Revenue from external
customers $ 374,472 $ 10,117 $ 20,332 $ 404,921
--------- --------- --------- ---------
Segment operating income (loss) 191,544 (31,464) 20,162 180,242
UNALLOCATED AMOUNTS
Selling, general and
administrative expenses (12,700)
Interest expense, net (28,656)
Debt conversion premium (22,731)
---------
Income before income taxes $ 116,155
=========
NINE MONTHS ENDED PRODUCT RESEARCH AND ROYALTY AND
SEPTEMBER 30, 2000 SALES DEVELOPMENT LICENSING TOTAL
------------------------------- ---------- ------------ ----------- ---------
Revenue from external
customers $ 134,555 $ 62,730 $ 12,076 $ 209,361
--------- --------- --------- ---------
Segment operating income (loss) 68,871 (132,664) 11,796 (51,997)
UNALLOCATED AMOUNTS
Selling, general and
administrative expenses (10,177)
Interest income, net 5,219
---------
Loss before income taxes $ (56,955)
=========
15. SUBSEQUENT EVENTS
EXECUTIVE STOCK PURCHASE PLAN LOANS
In September 2001, the Board of Directors of the Company authorized the
making of loans to certain of its executive officers in order to
finance the acquisition of common shares of the Company on the open
market pursuant to the Company's Executive Stock Purchase Plan
("ESPP"). During October 2001, the Company made loans in an aggregate
amount of $9,988,000 to those certain executive officers under the
ESPP. These loans are secured by the common shares purchased pursuant
to these loans and bear interest at a rate equal to the Company's rate
for borrowings. Each loan is due on the earlier of: a) September 30,
2003; b) 30 days following the termination or cessation of the
executive officer's employment with the Company; or c) where the
executive officer disposes of common shares of the Company with a value
equal or greater to the loan.
CONVERTIBLE SUBORDINATED PREFERRED EQUIVALENT DEBENTURES
During October 2001, the Company entered into additional privately
negotiated agreements with certain holders of its outstanding
Debentures. These agreements provided for the issuance of 296,122
common shares to those certain Debenture holders upon their surrender
of $8,375,000 aggregate principal amount of outstanding Debentures.
Following the surrender of Debentures described above, $126,140,000
aggregate principal amount of Debentures remain outstanding.
On October 27, 2001, the Company announced that it is exercising its
option to redeem all of its outstanding Debentures on November 27, 2001
(the "Redemption Date") under the terms of the special redemption
provided for in the indenture governing the Debentures. Accordingly,
holders of the outstanding Debentures will be entitled to receive
$53.375 for each $50 Debenture plus accrued and unpaid interest to the
Redemption Date. Those Debenture holders will also receive an
additional payment equal to
13
the present value of the aggregate amount of interest that would have
been payable on the Debentures from the Redemption Date to March 31,
2003. This additional payment, in the aggregate amount of $12,564,000,
will be paid on all outstanding Debentures whether or not those
Debentures are converted into common shares of the Company prior to the
Redemption Date. Prior to the Redemption Date, the holders of the
outstanding Debentures may convert their Debentures into common shares
of the Company at $30.3375 per common share. If all those Debenture
holders elect to convert their Debentures, the Company will issue an
aggregate of 4,157,890 common shares.
GLAXOSMITHKLINE AGREEMENTS
Biovail and GlaxoSmithKline plc ("GSK") announced that, as of
October 26, 2001, Biovail has licensed to GSK a novel
controlled-release, once-daily formulation of bupropion hydrochloride
(HCI) ("Wellbutrin Once Daily") for sales and distribution on a
worldwide basis. Bupropion HCI, which is marketed for the treatment of
depression as Wellbutrin SR by GSK, is currently sold in a
sustained-release, twice daily, dosage format. Under the terms of the
Wellbutrin Once Daily agreement, Biovail and GSK will collaborate
to direct regulatory and scientific development to receive regulatory
approval of Wellbutrin Once Daily. Biovail will manufacture and supply
Wellbutrin Once Daily to GSK for a share of the revenues generated by
future sales of Wellbutrin Once Daily. GSK and Biovail will co-promote
Wellbutrin SR and Biovail will have the option to co-promote Wellbutrin
Once Daily upon United States Food and Drug Administration ("FDA")
approval in the United States. GSK and Biovail intend to file a New
Drug Application ("NDA") for Wellbutrin Once Daily with the FDA during
the first half of 2002.
Biovail also acquired from GSK exclusive promotion and distribution
rights for prescription strength Zovirax Ointment and, upon FDA
approval, Zovirax Cream for the United States and Puerto Rico effective
January 1, 2002. Under the terms of the agreement, GSK will manufacture
and supply Zovirax Ointment and Zovirax Cream to Biovail and, in
return, Biovail will pay GSK $133,000,000 for certain rights to the
products. In the event of the termination of the development agreement
by either party, Biovail will be required to pay GSK additional rights
payments of $22,000,000 per year for calendar years 2002 through 2006,
with an aggregative cumulative total of all additional rights payments
not to exceed $99,000,000. Biovail will begin promotional efforts
related to Zovirax Ointment in January 2002 and intends to launch
Zovirax Cream upon FDA approval. In order to gain FDA approval for
Zovirax Cream, GSK will work with the FDA to reinstate an NDA
previously filed by GSK for the product. GSK will also conduct a
pediatric Phase IV study for the Zovirax Cream.
The agreements are subject to approval under the Hart-Scott-Rodino Act
in the United States.
BASE SHELF PROSPECTUS
On November 5, 2001, the Company filed a $1,500,000,000 base shelf
prospectus with the Canadian provincial securities commissions covering
the potential sale of any combination of common shares, debt securities
or warrants. On the same date, the Company filed a registration
statement on Form F-10 covering these securities with the U.S.
Securities and Exchange Commission under the multijurisdictional
disclosure system. The Company may offer one or more of these types of
securities in one or more offerings during the next 25 months. One or
more shareholders may sell common shares as well pursuant to the shelf
prospectus. The Company will not receive any of the proceeds from the
sale of common shares of the selling shareholders.
On November 5, 2001, the Company announced an offering of 12,500,000
common shares to be made under the base shelf prospectus.
14
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(All dollar amounts are expressed in U.S. dollars)
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") should be read in conjunction with the
accompanying unaudited consolidated financial statements and condensed notes
thereto. This MD&A should also be read in conjunction with the MD&A and audited
consolidated financial statements and notes thereto contained in our Annual
Report on Form 20-F for the fiscal year ended December 31, 2000.
OVERVIEW
Our results for the third quarter and first nine months of 2001 reflected the
impact of the strategic business acquisitions completed during fiscal year 2000.
Most notably the increase in our product sales reflected the addition of the
Cardizem(R) product line ("Cardizem(R)") which we acquired from Aventis
Pharmaceuticals Inc. ("Aventis"). Cardizem(R) is being marketed in Canada
through Biovail Pharmaceuticals Canada (formerly named Crystaal) ("BPI CDA"),
and in the United States through Biovail Pharmaceuticals, Inc. ("BPI USA"),
formerly DJ Pharma, Inc. ("DJ Pharma"), which we acquired in October 2000. In
addition to Cardizem(R), our third quarter and first nine months 2001 product
sales included the incremental revenue from the existing branded product
portfolio of BPI USA. The decline in research and development revenue reflected
our December 2000 acquisition of Intelligent Polymers Limited ("Intelligent
Polymers") and its development pipeline of branded generic products, which we
were developing on their behalf prior to September 29, 2000.
Our revenues are derived from sales of pharmaceutical products, providing
research and development services, and from royalties and license fees. Product
sales include sales of products developed and manufactured by us for our
licensees, direct marketing in Canada and the United States of proprietary and
in-licensed products, and revenue derived from product co-promotion. Research
and development revenues relate to product development activity on behalf of
third parties, and pharmaceutical contract research services. Royalties
primarily arise on sales of the products we developed. License fees are derived
from the license of our technologies or product rights.
RECENT DEVELOPMENT
We announced with GlaxoSmithKline plc ("GSK") that, as of October 26, 2001,
we have licensed to GSK a novel controlled-release, once-daily formulation of
bupropion hydrochloride (HCI) ("Wellbutrin Once Daily") for sales and
distribution on a worldwide basis. Bupropion HCI, which is marketed for the
treatment of depression as Wellbutrin SR by GSK, is currently sold in a
sustained-release, twice daily, dosage format. Under the terms of the
Wellbutrin Once Daily agreement, we will collaborate with GSK to direct
regulatory and scientific development to receive regulatory approval of
Wellbutrin Once Daily. We will manufacture and supply Wellbutrin Once Daily
to GSK for a share of the revenues generated by future sales of Wellbutrin
Once Daily. We will co-promote with GSK Wellbutrin SR and we will have the
option to co-promote Wellbutrin Once Daily upon United States Food and Drug
Administration ("FDA") approval in the United States. We intend, with GSK, to
file a New Drug Application ("NDA") for Wellbutrin Once Daily with the FDA
during the first half of 2002.
We also acquired from GSK exclusive promotion and distribution rights for
prescription strength Zovirax Ointment and, upon FDA approval, Zovirax Cream for
the United States and Puerto Rico effective January 1, 2002. Under the terms of
the agreement, GSK will manufacture and supply Zovirax Ointment and Zovirax
Cream to us and, in return, we will pay GSK $133 million for certain rights to
the products. In the event of the termination of the development agreement by
either party, we will be required to pay GSK additional rights payments of $22
million per year for calendar years 2002 through 2006, with an aggregative
cumulative total of all additional rights payments not to exceed $99 million. We
will begin promotional efforts related to Zovirax Ointment in January 2002 and
intend to launch Zovirax Cream upon FDA approval. In order to gain FDA approval
for Zovirax Cream,
15
GSK will work with the FDA to reinstate an NDA previously filed by GSK for the
product. GSK will also conduct a pediatric Phase IV study for the Zovirax Cream.
The agreements are subject to approval under the Hart-Scott-Rodino Act in the
United States.
CHANGE IN ACCOUNTING PRINCIPLE
We have adopted the U.S. Securities and Exchange Commission's ("SEC"), Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements", retroactively applied to January 1, 2000. Accordingly, we have
changed our revenue recognition accounting policy for up-front research and
development, product license and certain other fees. Historically, we had
recognized these fees as revenue when all the conditions to payment had been
met, and there were no further performance contingencies or conditions to our
receipt of payment. These fees were not creditable against future payments. At
January 1, 2000, the cumulative effect of the change in accounting principle on
prior years resulted in a charge of $43.5 million, which is included in the net
loss for the nine months ended September 30, 2000. The related deferred revenue
recognized for the three months ended September 30, 2001 and 2000 was $1.6
million and $1.8 million, respectively, and for the nine months ended September
30, 2001 and 2000 was $4.7 million and $5.5 million, respectively.
RESULTS OF OPERATIONS
Total revenue for the third quarter 2001 was $152.2 million, an increase of
$58.8 million or 63% from $93.4 million for the third quarter 2000. Net income
for the third quarter 2001 was $33.1 million, or diluted earnings per share of
$0.22, compared to a net loss of $100.8 million, or diluted loss per share of
$0.78, for the third quarter 2000.
The results for the third quarter 2001 included a $22.7 million debt conversion
premium related to the surrender of $165.5 million aggregate principal amount of
our outstanding 6.75% Convertible Subordinated Preferred Equivalent Debentures,
due March 31, 2025 ("Debentures"). The results for the third quarter 2000
included a $141.5 million charge for acquired research and development resulting
from our investment in IPL Acquireco 2000 Ltd. ("IPL Acquireco"). Excluding the
effect of these charges, net income and diluted earnings per share for the third
quarter 2001 would have been $55.8 million and $0.37, respectively, compared to
net income and diluted earnings per share of $40.7 million and $0.28,
respectively, for the third quarter 2000. Excluding the effect of these charges,
net income and diluted earnings per share increased by 37% and 32%, respectively
for the third quarter 2001 compared to the third quarter 2000.
Total revenue for the nine months ended September 30, 2001 was $404.9 million,
an increase of $195.5 million or 93% from $209.4 million for the same period
last year. Net income for the nine months ended September 30, 2001 was $106.4
million, or diluted earnings per share of $0.71, compared to a net loss of
$125.2 million, or diluted loss per share of $0.98, for the same period last
year.
The results for the nine months ended September 30, 2001 included the third
quarter 2001 debt conversion premium of $22.7 million. The results for the nine
months ended September 30, 2000, included first quarter 2000 charges of $20.0
million for the premium paid to extinguish our 10 7/8% U.S. Dollar Senior Notes
(the "Senior Notes") and $43.5 million for the cumulative effect at January 1,
2000 of the adoption of the SAB 101, and the third quarter 2000 charge of $141.5
million for acquired research and development. Excluding the effect of these
charges, net income and diluted earnings per share for the nine months ended
September 30, 2001 would have been $129.1 million and $0.86, respectively,
compared to net income and diluted earnings per share of $79.8 million and
$0.56, respectively, for the same period last year. Excluding the effect of
these charges, net income and diluted earnings per share increased by 62% and
54%, respectively for the nine months ended September 30, 2001 compared to the
same period last year.
16
REVENUE
The following table displays, for each period indicated, the dollar amount of
each source of revenue and total revenue, and the percentage change in the
dollar amount of each source and the total as compared to the corresponding
prior year period.
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
---------------------------------------- ----------------------------------------
2001 2000 Percentage 2001 2000 Percentage
$000S $000s Change $000S $000s Change
------------ ------------ ------------ ------------ ------------ ------------
Product sales $137,147 $53,318 157% $374,472 $134,555 178%
Research and development
6,588 34,434 (81%) 10,117 62,730 (84%)
Royalty and licensing
8,455 5,663 49% 20,332 12,076 68%
------------ ------------ ------------ ------------
Total revenue $152,190 $93,415 63% $404,921 $209,361 93%
============ ============ ============ ============ ============ ============
PRODUCT SALES
Product sales for the third quarter 2001 were $137.1 million compared to $53.3
million for the third quarter 2000, an increase of $83.8 million or 157%.
Product sales for the nine months ended September 30, 2001 were $374.5 million
compared to $134.6 million for the same period last year, an increase of $239.9
million or 178%. As a percentage of total revenue, product sales increased to
90% and 92% for the three months and nine months ended September 30, 2001,
respectively, compared to 57% and 64% for same periods last year.
The increase in product sales was due to the continuing strong performance of
Tiazac(R) combined with the contribution from Cardizem(R), incremental revenues
from BPI USA's branded products, and strong sales from our controlled-release
generic product portfolio, which were favourably impacted by the February 2001
launch of Procardia XL 30mg dosage and the fiscal year 2000 launches of Voltaren
XR, Adalat CC 30mg and 60mg dosages, and Procardia XL 60mg dosage.
On March 7, 2001, Eli Lilly & Company ("Eli Lilly") announced a voluntary recall
of Keftab tablets because of undefined problems with stability. Eli Lilly
manufactures and supplies the product to BPI USA for marketing in the United
States. As a result of this recall, our product sales and gross margins for the
third quarter and first nine months of 2001 have been negatively impacted by
lost sales and costs associated with the recall. We believe Eli Lilly is
responsible for manufacturing and supplying acceptable products to us, as well
as for the cost of the recall.
RESEARCH AND DEVELOPMENT
Research and development revenue for the third quarter 2001 was $6.6 million, a
decline of $27.8 million or 81% from $34.4 million for the third quarter 2000.
Research and development revenue for the nine months ended September 30, 2001
was $10.1 million, a decline of $52.6 million or 84% from $62.7 million for the
same period last year. As a percentage of total revenue, research and
development revenue declined to 4% and 3% for the three months and nine months
ended September 30, 2001, respectively, compared to 37% and 30% for the three
months and nine months ended September 30, 2000, respectively.
The decline in research and development revenue reflected our acquisition of
Intelligent Polymers in December 2000, and the elimination of revenue from
development activities performed on their behalf. We recorded revenue from
Intelligent Polymers of $30.8 million and $54.2 million for the three months and
nine months ended September 30, 2000, respectively.
ROYALTY AND LICENSING
Net royalty and licensing revenue for the third quarter 2001 was $8.5 million
compared to $5.7 million for the third quarter 2000, an increase of $2.8 million
or 49%. Net royalty and licensing revenue for the nine months ended September
30, 2001 was $20.3 million compared to $12.1 million for the same period last
year, an increase of $8.2
17
million or 68%. As a percentage of total revenue, royalty and licensing revenue
remained relatively constant at between 5% and 6% for all periods.
For all periods, most of our royalty and licensing revenue was derived from
royalties on sales of Tiazac(R) to Forest Laboratories Inc. The increases in the
three months and nine months ended September 30, 2001, compared to the same
periods last year, reflected higher Tiazac(R) product sales, and the inclusion
of a royalty associated with sales of Cardizem(R) by a third party.
OPERATING EXPENSES
The following table displays, for each period indicated, the dollar amount of
each operating expense item and total operating expenses, and the percentage
change in the dollar amount of each item and the total as compared to the
corresponding prior year period.
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
---------------------------------------- ----------------------------------------
2001 2000 Percentage 2001 2000 Percentage
$000S $000s Change $000S $000s Change
------------ ------------ ------------ ------------ ------------ ------------
Cost of goods sold $ 36,621 $ 16,786 118% $ 90,283 $ 41,333 118%
Research and development 12,018 22,392 (46%) 36,863 47,457 (22%)
Selling, general and
administrative 26,422 13,162 101% 77,675 38,196 103%
Amortization 11,107 1,022 987% 32,558 3,049 968%
------------ ------------ ------------ ------------
Total expenses $ 86,168 $ 53,362 61% $237,379 $ 130,035 83%
============ ============ ============ ============ ============ ============
COST OF GOODS SOLD AND GROSS MARGINS
Cost of goods sold was $36.6 million for the third quarter 2001 compared to
$16.8 million for the third quarter 2000, an increase of $19.8 million or 118%.
Cost of goods sold was $90.3 million for the nine months ended September 30,
2001 compared to $41.3 million for the same period last year, an increase of
$49.0 million or 118%.
The increases in the three months and nine months ended September 30, 2001, were
the result of increased product sales volumes from the addition of Cardizem(R),
BPI USA's branded products, and generic product launches.
Gross margins based on product sales for the third quarter 2001 and 2000 were
73% and 69%, respectively, and for the nine months ended September 30, 2001 and
2000 were 76% and 69%, respectively. Our gross margins are impacted period to
period by sales volumes, pricing, product mix and manufacturing volumes. The
improvement in gross margins for the three months and nine months ended
September 30, 2001 compared to the same periods last year reflected the positive
impact of the inclusion of Cardizem(R) and generic Tiazac(R) to the product mix.
The lower gross margin for the third quarter 2001 compared to the first nine
months of 2001 was due to certain inventory charges taken in the third quarter.
RESEARCH AND DEVELOPMENT
Research and development expenses were $12.0 million for the third quarter 2001
compared to $22.4 million for the third quarter 2000, a decrease of $10.4
million or 46%. Research and development expenses were $36.9 million for the
nine months ended September 30, 2001 compared to $47.5 million for the same
period last year, a decrease of $10.6 million or 22%. The decline in
year-over-year research and development expenses was primarily due to Phase III
clinical trials undertaken in the third quarter of 2000, related to once-daily
controlled release formulations of buspirone and tramadol under development for
Intelligent Polymers.
As a percentage of total revenue, research and development expenses declined to
8% and 9% for the three months and nine months ended September 30, 2001,
respectively, compared to 24% and 23% for the three months and nine months ended
September 30, 2000, respectively. Although research and development expenses
have declined as a percentage of total revenue, we are continuing to devote the
necessary resources towards our product pipeline.
18
Research and development expenses reflected direct spending on the development
of branded generic and generic products, and on rapid dissolve products
utilizing our FlashDose(R) technology.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the third quarter 2001 were
$26.4 million, an increase of $13.2 million or 101% from $13.2 million for the
third quarter 2000. Selling, general and administrative expenses for the nine
months ended September 30, 2001 were $77.7 million, an increase of $39.5 million
or 103% from $38.2 million for the same period last year. As a percentage of
total revenue, selling, general and administrative expenses increased to 17% and
19% for the three months and nine months ended September 30, 2001, respectively,
compared to 14% and 18% for the three months and nine months ended September 30,
2000, respectively.
The increase in selling, general and administrative expenses was mainly related
to the inclusion of BPI USA's sales and marketing operation in our results for
the third quarter and first nine months of 2001. In addition, with the
acquisition of Cardizem(R) the level of sales and marketing activity has
expanded at both BPI USA and BPI CDA.
AMORTIZATION
Amortization expense for the third quarter 2001 was $11.1 million compared to
$1.0 million for the third quarter 2000. Amortization expense for the nine
months ended September 30, 2001 was $32.6 million compared to $3.0 million for
the same period last year.
The increase in amortization expense reflected the amortization of product
rights and goodwill associated with the acquisition of DJ Pharma, and the
amortization of the Cardizem(R) brand name. In addition, amortization expense
for the third quarter and first nine months of 2001 includes the amortization of
the exclusive marketing rights to generic Adalat CC 30mg dosage ("Adalat")
acquired from Elan Corporation, plc ("Elan") in December 2000. In comparison, in
the third quarter and first nine months of 2000 we recorded revenue from Adalat
product sales net of royalties paid to Elan.
ACQUIRED RESEARCH AND DEVELOPMENT
In September 2000, we incurred a $141.5 million charge, equal to our investment
in non-voting, Class A shares of IPL Acquireco, for acquired research and
development since the recovery of our investment was dependent, under all
circumstances, upon the eventual commercial success of the products under
development. As of the investment date, the products under development were in
various stages of completion, had not reached technological feasibility, and had
no known alternative uses.
NON-OPERATING ITEMS
INTEREST INCOME AND EXPENSE
For the third quarter 2001, net interest expense of $6.5 million was comprised
of interest expense of $7.0 million net of interest income of $504,000, compared
to net interest income of $3.1 million for the third quarter 2000, comprised of
interest income of $8.5 million net of interest expense of $5.4 million. For the
nine months ended September 30, 2001, net interest expense of $28.7 million was
comprised of interest expense of $30.3 million net of interest income of $1.6
million, compared to net interest income of $5.2 million for the same period
last year, comprised of interest income of $20.0 million net of interest expense
of $14.8 million.
The increase in interest expense primarily reflected interest on advances under
our revolving term Senior Secured Credit Facility (the "Credit Facility"), and
the amortization of the discount on the obligations to Aventis for Cardizem(R)
and to Elan for Adalat. For the three months and nine months ended September 30,
2001, the non-cash amortization of these discounts amounted to $2.4 million and
$9.5 million, respectively.
19
The decrease in interest income reflected a decline in the average size of our
investment portfolio following the acquisitions of DJ Pharma and Intelligent
Polymers in the fourth quarter of 2000, and after the first three quarterly
instalment payments to Aventis and repayments made under the Credit Facility.
DEBT CONVERSION PREMIUM
During August 2001, we entered into privately negotiated agreements with certain
holders of our outstanding Debentures. These agreements provided for the
issuance of 5,982,541 common shares to those certain Debenture holders upon
their surrender of $165.5 million aggregate principal amount of outstanding
Debentures. In the third quarter of 2001, we recorded a charge to income of
$22.7 million, which represented the market value of the additional shares
issued in excess of the number of shares which would have been issued under the
terms of the conversion ratio provided for in the indenture governing the
Debentures.
We recorded an increase to common shares of $183.6 million, which included the
charge to income combined with the carrying value of the Debentures on the date
of surrender of $160.9 million. The carrying value of the Debentures was
comprised of the aggregate principle amount of the Debentures and the unpaid
accrued interest to the date of surrender of $1.2 million, reduced by the
proportionate unamortized deferred financing costs related to the Debentures of
$5.8 million.
INCOME TAXES
Our tax rate was affected by the relative profitability of our operations in
various foreign tax jurisdictions. We recorded provisions for income taxes of
$3.7 million and $2.5 million for the three months ended September 30, 2001 and
2000, respectively, and $9.8 million and $4.7 million for the nine months ended
September 30, 2001 and 2000, respectively. The low effective tax rate reflected
that most of our income was derived from foreign subsidiaries with lower
statutory tax rates than those that apply in Canada. The benefit of tax losses
historically incurred by our Canadian operations has not been recognized for
accounting purposes to date. With our acquisitions of DJ Pharma and Fuisz
Technologies Ltd. ("Fuisz"), acquired in November 1999, we have experienced an
increase in our effective tax rate, as these operations earn income
predominately in the United States.
EXTRAORDINARY ITEM
The total consideration paid to repurchase our Senior Notes in March 2000 was
$141.0 million of which $16.0 million was an inducement premium to the holders.
As a result of this transaction, we replaced our high yield debt with
convertible debt at a significantly lower cost of borrowing. The extraordinary
item reported in the first quarter of 2000 included the premium paid, and $4.0
million of deferred financing costs associated with the Senior Notes that were
written-off.
EBITDA
EBITDA, which is defined as earnings before interest, taxes, depreciation and
amortization, and excluding debt conversion premium, cumulative effect of change
in accounting principle, extraordinary item and acquired research and
development, was $80.4 million for the third quarter 2001, an increase of $35.4
million or 79% from $45.0 million for the third quarter 2000. EBITDA for the
nine months ended September 30, 2001 was $209.3 million, an increase of $115.0
million or 122% from $94.3 million for the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, we had cash and cash equivalents of $27.8 million
compared to cash and cash equivalents of $125.1 million at December 31, 2000. In
December 2000, we arranged a $300 million Credit Facility that, subject to
certain covenants, permits us to borrow funds for general corporate purposes
including acquisitions. In June 2001, the Credit Facility was successfully
syndicated and our available line of credit under the Credit Facility was
increased to $400 million. All other material terms and conditions are
unchanged.
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At September 30, 2001, we had total long-term obligations of $269.5 million,
including the current portion thereof. Long-term obligations consisted of $179.0
million drawn on the Credit Facility, $41.9 million discounted amount owing to
Elan for Adalat, $41.7 million discounted amount owing to Aventis for
Cardizem(R), and $6.9 million of other obligations. At December 31, 2000, we had
$438.7 million of long-term obligations, including the current portion thereof,
which consisted of $210 million drawn on the Credit Facility, $161.8 million
discounted amount owing to Aventis, $58.1 million discounted amount owing to
Elan, and $8.8 million of other obligations.
At September 30, 2001, we had $134.5 million of Debentures outstanding,
following the surrender of $165.5 million aggregate principal amount of
Debentures, compared to $300.0 of Debentures outstanding at December 31, 2000.
During October 2001, we entered into additional privately negotiated agreements
with certain holders of our outstanding Debentures. These agreements provided
for the issuance of 296,122 common shares to those certain Debenture holders
upon their surrender of $8.4 million aggregate principal amount of outstanding
Debentures. Following the surrender of these additional Debentures, $126.1
million aggregate principal amount of Debentures remain outstanding.
On October 27, 2001, we announced that we are exercising our option to redeem
all of our outstanding Debentures on November 27, 2001 (the "Redemption Date")
under the terms of the special redemption provided for in the indenture
governing the Debentures. Accordingly, holders of the outstanding Debentures
will be entitled to receive $53.375 for each $50 Debenture plus accrued and
unpaid interest to the Redemption Date. Those Debenture holders will also
receive an additional payment equal to the present value of the aggregate amount
of interest that would have been payable on the Debentures from the Redemption
Date to March 31, 2003. This additional payment, in the aggregate amount of
$12.6 million, will be paid on all outstanding Debentures whether or not those
Debentures are converted into our common shares prior to the Redemption Date.
Prior to the Redemption Date, the holders of the outstanding Debentures may
convert their Debentures into our common shares at $30.3375 per common share. If
all those Debenture holders elect to convert their Debentures, we will issue an
aggregate of 4,157,890 common shares.
During August 2001, we entered into privately negotiated agreements with certain
holders of our outstanding warrants. These agreements provided for the exercise
of 752,100 warrants to purchase 3,008,400 common shares. Each warrant entitled
the holder to purchase four of our post-split common shares at an exercise price
of $10.00 per share. As an inducement to those certain warrant holders to
exercise, we paid such warrant holders $2.00 per warrant exercised. In
aggregate, we received proceeds of $28.6 million net of the inducement cost of
$1.5 million.
During September 2001, we implemented a common share repurchase program pursuant
to which we were able to repurchase up to $120 million of our issued and
outstanding common shares. Prior to September 30, 2001, 2,871,200 common shares
had been repurchased under this program, through open market transactions on the
New York Stock Exchange, at an average purchase price of $41.79 for total
consideration of $120.0 million. At September 30, 2001, we had settled $78.7
million of these transactions and had accrued $41.3 million for the remainder.
The excess of the cost of the common shares acquired over the stated capital
thereof, totaling $105.6 million was charged to the deficit.
Cash provided by operating activities was $168.1 million for the nine months
ended September 30, 2001 compared to $46.2 million for the same period last
year. The increase reflected net income, after adjustments for non-cash items,
of $184.5 million for the nine months ended September 30, 2001 compared to $94.7
million for the same period last year. Changes in non-cash operating items used
cash of $16.4 million for the nine months ended September 30, 2001 mainly due to
increases in accounts receivable and inventories offset by increases in accounts
payables and accrued liabilities. In comparison, changes in non-cash operating
items used cash of $48.5 million for the nine months ended September 30, 2000
mainly due to increases in accounts receivable and inventories, and decreases in
accounts payable and accrued liabilities.
Net cash used in investing activities was $51.1 million for the nine months
ended September 30, 2001 compared to $117.8 million for the same period last
year. Additions to property, plant and equipment were $37.9 million and $11.1
million for the nine months ended September 30, of 2001 and 2000, respectively.
We settled $4.0 million of
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acquisition costs related to Cardizem(R), and acquired other intangible assets
for $23.8 million in the nine months ended September 30, 2001, offset by $14.7
million recovered from Elan as a reduction to the minimum license payments
otherwise payable under the Adalat marketing agreement. In September 2000, we
invested $141.5 million in non-voting, Class A shares of IPL Acquireco. The net
activity in short-term investments provided cash of $16.7 million for the nine
months ended September 30, 2000. Overall during fiscal year 2000, as our
short-term investments matured we generally converted them into cash equivalents
with original maturities of 90 days or less. For the nine months ended September
30, 2000, we received proceeds of $20 million on the disposal of Clonmel
Healthcare Limited, a subsidiary of Fuisz.
Net cash used in financing activities was $214.3 million for the nine months
ended September 30, 2001 compared to cash provided by financing activities of
$242.4 million for the same period last year. Proceeds from the issue of common
shares on the exercise of stock options and through our Employee Stock Purchase
Plan were $14.9 million and $8.8 million for the nine months ended September 30,
2001 and 2000, respectively. Proceeds from the exercise of warrants were $28.6
million for the nine months ended September 30, 2001. During September 2001, we
settled $78.7 million of open market transactions under our common share
repurchase program. For the nine months ended September 30, 2001, we made net
repayments of $32.3 million under our Credit Facility, and repaid $146.9 million
of other long-term obligations, including the first three quarterly instalments
to Aventis of $42.5 million each, and $18.9 million to Elan. For the nine months
ended September 30, 2000, we repaid the debt assumed on the acquisition of Fuisz
and other long-term obligations of $11.4 million. Net proceeds from concurrent
offerings in March 2000 were $95.3 million from the issue of common shares, and
$288.5 million from the issue of Debentures. A portion of these proceeds was
used to repurchase our Senior Notes for $141.0 million. We collected $2.3
million of the warrant subscription receivable in nine months ended September
30, 2000.
Overall, our cash and cash equivalents decreased by $97.4 million for the nine
months ended September 30, 2001, and increased by $170.6 million for the same
period last year.
We believe we have adequate capital resources and sources of financing to
support our ongoing operational and interest requirements, investment
objectives, and to meet our obligations as they become due. We believe we will
be able to raise additional capital, if necessary, to support our objectives.
On November 5, 2001, we filed a $1.5 billion base shelf prospectus with the
Canadian provincial securities commissions covering the potential sale of any
combination of common shares, debt securities or warrants. On the same date, we
filed a registration statement on Form F-10 covering these securities with the
U.S. Securities and Exchange Commission under the multijurisdictional disclosure
system. We may offer one or more of these types of securities in one or more
offerings during the next 25 months. One or more shareholders may sell common
shares as well pursuant to the shelf prospectus. We will not receive any of the
proceeds from the sale of common shares of the selling shareholders.
On November 5, 2001, we announced an offering of 12,500,000 common shares to be
made under the base shelf prospectus.
QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 do not use derivative financial
instruments for speculative or trading purposes.
Inflation has not had a significant impact on our results of operations.
FOREIGN CURRENCY RISK
We operate internationally, however a substantial portion of our revenue and
expense activities and capital expenditures are transacted in U.S. dollars. Our
only other significant transactions are in Canadian dollars, and we do not
believe we have a material exposure to foreign currency risk because of the
relative stability of the Canadian
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dollar in relation to the U.S. dollar. A 10% adverse change in foreign currency
exchange rates would not have a material effect on our consolidated results of
operations, financial position, or cash flows.
INTEREST RATE RISK
The primary objective of our investment policy is the protection of principal,
and accordingly we invest in high-grade commercial paper and U.S. government
treasury bills with varying maturities, but typically less than 90 days.
External independent fund administrators manage our investments. As it is our
intent and policy to hold these investments until maturity, we do not have a
material exposure to interest rate risk. Therefore, a 100 basis-point adverse
change in interest rates would not have a material effect on our investment
portfolio.
We are exposed to interest rate risk on borrowings under our Credit Facility.
The Credit Facility bears interest based on LIBOR, U.S. dollar base rate,
Canadian dollar prime rate, or Canadian dollar Bankers' Acceptances. Based on
projected advances under the Credit Facility, a 100 basis-point adverse change
in interest rates would not have a material effect on our consolidated results
of operations, financial position, or cash flows. This risk is further mitigated
by our ability, at our option, to lock in a rate of interest for a period of up
to one year.
The interest rate on our Debentures is fixed and therefore not subject to
interest rate risk. Likewise, the imputed rates of interest used to discount our
long-term obligations to Aventis and Elan are fixed and therefore not subject to
interest rate risk.
EQUITY MARKET PRICE RISK
We are exposed to equity market price risks on our long-term, available-for-sale
investments in traded companies. We do not hold significant investments in these
types of securities, and therefore our equity market price risk is not material.
Therefore, a 10% adverse change in equity market prices would not have a
material effect on our financial position.
RECENT ACCOUNTING DEVELOPMENTS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001. Under SFAS No. 141, all business combinations
occurring after June 30, 2001 are to be accounted for under the purchase method
of accounting. Under SFAS No. 142, goodwill and other intangible assets deemed
to have indefinite lives will no longer be amortized, but will be subject to
annual impairment tests. Other intangible assets will continue to be amortized
over their estimated useful lives.
We will adopt SFAS No. 142 as of January 1, 2002 as required. We will perform
the first of the required impairment tests of goodwill and indefinite lived
intangible assets as of January 1, 2002. Any impairment loss for goodwill and
indefinite lived intangible assets arising from the initial application of SFAS
No. 142 is to be reported as resulting from a change in accounting principle. We
have not yet determined what the effect of adopting the provisions of SFAS No.
142 will be on our financial position or results of operations.
FORWARD LOOKING STATEMENTS
To the extent any statements made in this document contain information that is
not historical, these statements are essentially forward looking and are subject
to risks and uncertainties, including the difficulty of predicting FDA
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, the regulatory
environment, fluctuations in operating results and other risks. Many risks and
uncertainties are inherent in the pharmaceutical industry; others are more
specific to our business. Many of the significant risks related to our business
are described in Item 1 of our Annual Report on Form 20-F for the fiscal year
ended December 31, 2000 filed with the SEC.
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BIOVAIL CORPORATION
PART II - OTHER INFORMATION
1. OPERATIONAL INFORMATION
The press releases issued by the Company subsequent to filing of Form
6-K on August 29, 2001 were as follows:
a) On September 6, 2001, the Company reported positive tramadol
extended release clinical results.
b) On September 17, 2001, the Company announced the Board approved a
stock-repurchase program.
c) On September 21, 2001, the Company commented on decision of
District Court Southern District of Florida; announced appeal of
Court's Decision; reconfirmed comfort with consensus estimates.
d) On October 2, 2001, the Company announced the filing of a NDA for
Fluoxetine FlashDose(R) brand.
e) On October 23, 2001, the Company announced the third quarter 2001
earnings release date.
f) On October 27, 2001, the Company announced a call for redemption
of its outstanding 6.75% convertible securities and the filing of
a preliminary shelf prospectus with securities commissions.
g) On October 29, 2001, the Company reported record third quarter
2001 results.
h) On October 29, 2001, the Company announced that Biovail and
GlaxoSmithKline signed licensing agreements for once-daily
formulation of Wellbutrin and distribution rights for Zovirax
ointment and cream.
i) On November 5, 2001, the Company announced public offerings.
2. LEGAL PROCEEDINGS
For detailed information concerning legal proceedings, reference is
made to note 13 to the consolidated financial statements filed under
Part I of this quarterly report, and to Item 8.A. of the Company's
Annual Report on Form 20-F for the fiscal year ended December 31, 2000.
3. MATERIAL ISSUED TO SHAREHOLDERS
The material issued by the Company to shareholders is attached as the
following exhibit:
Exhibit 99.1 Third Quarter 2001 Interim Report for Canadian
Regulatory Purposes
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Biovail Corporation
November 13, 2001 By /s/John R. Miszuk
-----------------
John R. Miszuk
Vice President, Controller
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