Biovail CEO Bill Wellsah
The merger of Canadian pharmaceutical giant Biovail with a U.S. rival will create more cost savings than initially expected, prompting investors to boost their enthusiasm about the deal.
In a filing Tuesday with the U.S. Securities and Exchange Commission, the chief executive officer of Biovail's new partner, Valeant revealed that the merger will save as much as $300-million (U.S.) in costs. In 2011 the savings will amount to at least $200-million, Michael Pearson said, with another $100-million added the following year.
When the deal was first announced in June, the savings were projected at $175-million.
The news lit a fire under Mississauga, Ont.-based Biovail's stock, which jumped more than 10 per cent to close at $27.52 (Canadian). California-based Valeant's stock rose more than 6 per cent on the New York Stock Exchange to $63.84 (U.S.). Before the merger was proposed, Biovail shares were languishing in the $15 (Canadian) range.
The cost savings, however, are coming at a high price to Biovail and Valeant employees. About 25 per cent of the companies' combined work force of more than 4,000 workers across the U.S. and Canada will lose their jobs, according to the SEC filing, which was in the form of an open letter to employees at Biovail and Valeant from Mr. Pearson. Individuals will get the bad news by Oct. 15.
In his letter, Mr. Pearson said the merged company - which will take the Valeant name, but a corporate headquarters in Mississauga - plans to be "the leading specialty pharmaceutical company in the world." It will have a diversified portfolio selling drugs for dermatology, neurology and ophthalmology, he said.
While the company will perform "substantially less" research and development than its peers, innovation will take place by buying products from others, Mr. Pearson said.
Jason Hornett, co-lead manager of the Bissett All Canadian Focus Fund, which owns about 390,000 Biovail shares, said it is "very good news [that]we're going to get more cost savings and we're going to get them sooner." He was already enthusiastic about the balance of cash flow and growth that will result from the Valeant-Biovail merger, and now he feels it will be even better for investors.
Analyst Marc Goodman at UBS Securities said in a report Tuesday that he expects Biovail stock to "keep moving higher." It is not just the cost savings that were good news, he said. Mr. Pearson's estimate that the combined company will have a cash tax rate of about 15 per cent by the end of 2012 is several points lower than projected, Mr. Goodman said, and that will add further to profits.
Hari Sambasivam, an analyst at National Bank Financial Inc., raised his rating on Biovail to "outperform" from "sector perform" after the news of the higher than expected cost savings. He also raised his target price on the stock to $32 from $25.
Under the terms of the merger deal, Valeant shareholders will get 1.7809 Biovail shares for each share they own of their own company. They will also get a $16.77 (U.S.) special dividend per share just before the merger closes, likely around the end of the year.
Biovail shareholders don't get that dividend, but all shareholders will get another $1 special dividend after the deal is done.
Mr. Pearson will be chief executive officer of the new entity, while Biovail CEO Bill Wells will become non-executive chairman.
The merger requires approval from shareholders of both companies, at meetings scheduled for Sept. 27.