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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 20-F
/ / Registration Statement Pursuant to Section 12(b) or 12(g) of The Securities
Exchange Act of 1934
OR
/X/ Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2000
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 for the transition period from to
COMMISSION FILE NUMBER 001-11145
BIOVAIL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
NOT APPLICABLE
(Translation of Registrant's Name into English)
PROVINCE OF ONTARIO, CANADA
(Jurisdiction of incorporation or organization)
2488 DUNWIN DRIVE
MISSISSAUGA, ONTARIO
CANADA, L5L 1J9
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Shares, No Par Value New York Stock Exchange
Toronto Stock Exchange
Warrants, each warrant entitling New York Stock Exchange
the holder to purchase four Common
Shares, no par value, of Biovail Corporation
6.75% Convertible Subordinated Preferred New York Stock Exchange
Equivalent Debentures due March 31, 2025
Securities registered or to be registered pursuant to Section 12(g) of the Act:
NONE
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: NONE
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report: 131,461,060 common shares, no par value, as of December 31, 2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 ____ Item 18 X
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TABLE OF CONTENTS
GENERAL INFORMATION
PART 1
PAGE
--------
Item 1. Identity of Directors, Senior Management and Advisors............ 1
Item 2. Offer Statistics and Expected Timetable.......................... 1
Item 3. Key Information.................................................. 1
A. Selected Consolidated Financial Data........................ 1
B... Capitalization and Indebtedness............................. 2
C. Reasons for the Offer and Use of Proceeds................... 2
D. Risk Factors................................................ 2
Item 4. Information on the Company....................................... 6
A. History and Development of the Company........................... 6
B. Business Overview................................................ 6
C. Organizational Structure......................................... 31
D. Property, Plant and Equipment.................................... 31
Item 5. Operating and Financial Review and Prospects..................... 33
Item 6. Directors, Senior Management and Employees....................... 60
A. Directors and Officers of the Company....................... 60
B. Compensation of Directors................................... 62
C. Board Practices............................................. 65
D. Employees................................................... 65
E. Share Ownership............................................. 66
Item 7. Major Shareholders and Related Party Transactions................ 66
A. Major Shareholders.......................................... 66
B. Related Party Transactions.................................. 67
C. Interests of Experts and Counsel............................ 67
Item 8. Financial Information............................................ 67
A. Consolidated Statements and Other Financial Information..... 67
B. Significant Changes......................................... 68
Item 9. The Offering and Listing......................................... 69
A. Nature of Trading Markets................................... 69
B. Plan of Distribution........................................ 70
C. Markets..................................................... 70
D. Selling Shareholders........................................ 70
E. Dilution.................................................... 70
F. Expenses of the Issue....................................... 71
Item 10. Additional Information........................................... 71
A. Share Capital............................................... 71
B. Memorandum and Articles of Association...................... 71
i
PAGE
--------
C. Material Contracts.......................................... 72
D. Exchange Controls........................................... 72
E. Taxation.................................................... 73
F. Dividends and Paying Agents................................. 76
G. Statements by Experts....................................... 76
H. Documents on Display........................................ 76
I. Subsidiary Information...................................... 77
Item 11. Quantitative and Qualitative Disclosures About Market Risk....... 77
Item 12. Description of Securities Other Than Equity Securities........... 77
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.................. 77
Item 14. Material Modification to the Rights of Security Holders and Use
of Proceeds...................................................... 77
Item 15. [RESERVED]....................................................... 78
Item 16. [RESERVED]....................................................... 78
PART III
Item 17. Financial Statements............................................. 78
Item 18. Financial Statements............................................. 78
Item 19. Exhibits......................................................... II-1
Signatures....................................................... II-2
BASIS OF PRESENTATION
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. Unless otherwise indicated, references to
dollars, "U.S.$", "US$" or "$" are to U.S. dollars and references to "Cdn$" are
to Canadian dollars.
FORWARD LOOKING INFORMATION
"Safe Harbor" statement under the Private Securities Litigation Reform Act of
1995:
To the extent that 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
U.S. Food and Drug Administration and Canadian Therapeutic Product Program
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 detailed from
time to time in the Company's various filings with the Securities and Exchange
Commission.
ii
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable
ITEM 3. KEY INFORMATION
A. SELECTED CONSOLIDATED FINANCIAL DATA
We changed from publicly reporting our financial results prepared in
accordance with Canadian generally accepted accounting standards ("GAAP") to
publicly reporting those results prepared in accordance with U.S. GAAP for the
year ended December 31, 2000. Our independent auditors, who we have retained
beginning with the year January 1, 1999, have audited our financial statements
prepared in accordance with U.S. GAAP for the years ended December 31, 2000 and
1999. The financial statements prepared in accordance with Canadian GAAP for
each of the years ended December 31, 2000, 1999 and 1998 which includes a
reconciliation to U.S. GAAP have also been audited. The audited financial
statements prepared in accordance with Canadian and U.S. GAAP are included under
Item 18 "Financial Statements".
The following tables of selected consolidated financial data of the Company
have been prepared in accordance with Canadian and U.S. GAAP. The data is
qualified by reference to and should be read in conjunction with the
consolidated financial statements and related notes thereto prepared in
accordance with Canadian and U.S. GAAP.
IN ACCORDANCE WITH CANADIAN GAAP
(ALL DOLLAR AMOUNTS ARE EXPRESSED IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE
DATA)
2000 1999(1) 1998(1) 1997(1) 1996(1)
---------- -------- -------- -------- --------
Restated Restated Restated Restated
CONSOLIDATED OPERATING DATA:
Revenue...................................... $ 311,457 $165,092 $ 98,836 $ 64,279 $ 66,430
Operating income............................. 116,223 64,117 35,145 19,433 23,606
Net income attributable to common
shareholders............................... 81,163 51,080 31,419 17,141 23,284
Basic earnings per share(2).................. 0.63 0.50 0.29 0.17 0.23
Diluted earnings per share(2)................ $ 0.57 $ 0.47 $ 0.29 $ 0.16 $ 0.22
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 125,144 $178,086 $ 78,279 $ 8,275 $ 4,526
Working capital.............................. (25,295) 256,768 109,124 44,663 9,606
Total assets................................. 1,460,967 635,137 199,919 93,739 58,606
Long-term obligations........................ 438,744 137,504 126,835 4,847 6,968
Shareholders' equity......................... $ 839,110 $391,794 $ 19,091 $ 57,358 $ 36,943
Number of common shares issued and
outstanding................................ 131,461 124,392 99,444 106,644 101,708
------------
(1) Prior years' figures have been restated to reflect changes in accounting
policies that were adopted during 2000 to give effect to the retroactive
applications of the U.S. Securities and Exchange Commission's, Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements", and The Canadian Institute of Chartered Accountants' Handbook
Section 3500, "Earnings Per Share".
(2) Earnings per share are based on net income attributable to common
shareholders. Basic earnings per share are computed using the weighted
average number of shares outstanding for the reporting period. Diluted
earnings per share are calculated after giving effect to potentially
dilutive warrants, stock options and convertible securities.
1
IN ACCORDANCE WITH U.S. GAAP
(ALL DOLLAR AMOUNTS ARE EXPRESSED IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE
DATA)
2000 1999 1998(1) 1997(1) 1996(1)
---------- --------- --------- --------- ---------
Unaudited Unaudited Unaudited
CONSOLIDATED OPERATING DATA:
Revenue................................. $ 309,170 $ 172,464 $111,657 $ 81,629 $ 66,430
Operating income (loss)................. (78,032)(2) (40,160)(4) 45,303 35,114 22,986
Net income (loss)....................... (147,976)(3) (109,978)(5) 41,577 32,822 22,664
Basic earnings (loss) per share(6)...... (1.16)(3) (1.07)(5) 0.39 0.32 0.22
Diluted earnings (loss) per share(6).... $ (1.16)(3) $ (1.07)(5) $ 0.38 $ 0.31 $ 0.21
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............... $ 125,144 $ 178,086 $ 78,279 $ 8,275 $ 4,526
Working capital......................... (25,295) 266,068 114,898 47,663 9,606
Total assets............................ 1,107,267 467,179 198,616 93,739 58,606
Long-term obligations................... 438,744 137,504 126,835 4,847 6,968
Convertible Subordinated Preferred
Equivalent Debentures................. 299,985 -- -- -- --
Shareholders' equity.................... $ 237,458 $ 267,336 $ 49,888 $ 75,458 $ 36,943
Number of common shares issued and
outstanding........................... 131,461 124,392 99,444 106,644 101,708
------------
(1) Figures for 1998 and prior years have been derived from the audited
consolidated financial statements prepared in accordance with Canadian GAAP,
and the reconciliation of material differences between Canadian and
U.S. GAAP included in the notes thereto.
(2) After deducting a charge of $208.4 million for acquired research and
development.
(3) After deducting charges of $208.4 million for acquired research and
development, $20.0 million for an extraordinary item relating to the premium
paid on the early extinguishment of the U.S. Dollar Senior Notes, and
$43.5 million for the cumulative effect of the adoption of SAB 101.
(4) After deducting a charge of $105.7 million for acquired research and
development.
(5) After deducting a charge of $105.7 million for acquired research and
development, an equity loss in Fuisz Technologies Ltd. of $58.4 million, and
a net gain on disposal of long-term investments of $1.9 million.
(6) Earnings (loss) per share are based on net income (loss). Basic earnings
(loss) per share are computed using the weighted average number of shares
outstanding for the reporting period. Diluted earnings (loss) per share are
calculated after giving effect to potentially dilutive warrants, stock
options and convertible securities.
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable
D. RISK FACTORS
In addition to the risks described below, you should also carefully consider
any risks that might be described in other filings we make with the
U.S. Securities and Exchange Commission (the "SEC").
THE PHARMACEUTICAL INDUSTRY IS HIGHLY COMPETITIVE AND IS SUBJECT TO RAPID AND
SIGNIFICANT TECHNOLOGICAL CHANGE WHICH COULD RENDER OUR TECHNOLOGIES AND
PRODUCTS OBSOLETE AND UNCOMPETITIVE.
Our products face intense competition from conventional forms of drug
delivery and from controlled-release drug delivery systems developed, or under
development, by other pharmaceutical companies. We compete with companies in the
United States and abroad, including major pharmaceutical and chemical
2
companies, specialized contract research organizations, research and development
firms, universities and other research institutions. Some of our competitors are
also licensees (or potential licensees) of our products. Many of our competitors
have greater financial resources and marketing capabilities than we do, and they
may be less leveraged. Some of our competitors have greater experience than we
do in clinical testing and human clinical trials of pharmaceutical products and
in obtaining U.S. Food and Drug Administration ("FDA") and other regulatory
approvals. Our competitors may succeed in developing technologies and products
that are more effective or cheaper to use than any we may develop or license.
These developments could render our technologies and products obsolete or
uncompetitive, which would have a material adverse effect on our business and
financial results.
OUR BUSINESS IS SUBJECT TO LIMITATIONS IMPOSED BY GOVERNMENT REGULATIONS.
The cost of complying with government regulation can be substantial.
Governmental authorities in the United States and Canada and comparable
authorities in foreign countries also regulate the research and development,
manufacture, testing and safety of controlled-release products. The regulations
applicable to our existing and future products may change. There can be long
delays in obtaining required clearances from regulatory authorities in any
country after applications are filed. Government agencies in the United States,
Canada and other countries in which we carry on business regulate pharmaceutical
products intended for human use. Regulations require extensive clinical trials
and other testing and government review and final approval before we can market
these products.
Requirements for approval vary widely from country to country outside of the
United States and Canada. Whether or not approved in the United States or
Canada, regulatory authorities in other countries must approve a product prior
to the commencement of marketing the product in those countries. The time
required to obtain any such approval may be longer or shorter than in the United
States or Canada.
Any failure or delay in obtaining regulatory approvals could adversely
affect the marketing of any products we develop and therefore our business,
results of operations, financial condition and cash flows.
THERE IS UNCERTAINTY REGARDING OUR PATENTS AND PROPRIETARY TECHNOLOGY AND PATENT
PROTECTION IS UNPREDICTABLE.
Competitors may have filed patent applications, or hold issued patents,
relating to products or processes competitive with those we are developing. Our
patent applications for a product may not be approved. The patents of our
competitors may impair our ability to do business in a particular area. Others
may independently develop similar products or duplicate any of our unpatented
products. While we have not routinely sought patents on our controlled-release
technology, we do have the exclusive right to the patented technology for
Tiazac-Registered Trademark-. Our success will depend, in part, on our ability
in the future to obtain patents, protect trade secrets and other proprietary
information and operate without infringing on the proprietary rights of others.
Historically, we have relied on trade secrets, know-how and other
proprietary information as well as requiring our employees and other vendors and
suppliers to sign confidentiality agreements. However, these confidentiality
agreements may be breached, and we may not have adequate remedies for any
breach. Others may independently develop substantially equivalent proprietary
information. Third parties may otherwise gain access to our proprietary
information.
There has been substantial litigation in the pharmaceutical industry
concerning the manufacture, use and sale of new products that are the subject of
conflicting patent rights. When we file an Abbreviated New Drug Application
("ANDA") for a generic drug, we are required to certify to the FDA that any
patent which has been listed with the FDA as covering the branded product has
expired, the date any such patent will expire, or that any such patent is
invalid or will not be infringed by the manufacture, sale or use of the new drug
for which the application is submitted. Approval of an ANDA is not effective
until each listed patent expires, unless the applicant certifies that the
patents at issue are not infringed or are invalid and so notifies the patent
holder and the holder of the branded product New Drug Application ("NDA"). A
patent holder may challenge a notice of non-infringement or invalidity by suing
for patent infringement within 45 days of receiving notice. Such a challenge
would prevent FDA approval for a period which ends 30 months after the receipt
of notice, or sooner
3
if an appropriate court rules that the patent is invalid or not infringed. From
time to time, in the ordinary course of business, we face such challenges.
The expense of litigation, whether or not we are successful, could have a
material adverse effect on our business, results of operations, financial
condition and cash flows. Such lawsuits may be brought and the ultimate outcome
of such litigation, if commenced, could have a material adverse effect on our
business, results of operations, financial condition and cash flows. Regardless
of FDA approval, should anyone commence a lawsuit with respect to any alleged
patent infringement by us, whether because of the filing of an ANDA or
otherwise, the uncertainties inherent in patent litigation make the outcome of
such litigation difficult to predict.
THERE IS NO ASSURANCE THAT WE WILL CONTINUE TO BE SUCCESSFUL IN OUR LICENSING
AND MARKETING OPERATIONS.
Certain of our products are marketed by third parties by way of license
agreements or otherwise. Such third-party arrangements may not be successfully
negotiated in the future. Any such arrangements may not be available on
commercially reasonable terms. Even if acceptable and timely marketing
arrangements are available, the products we develop may not be accepted in the
marketplace. Even if such products are initially accepted, sales may thereafter
decline. Additionally, our clients or marketing partners may make important
marketing and other commercialization decisions with respect to products we
develop without our input. As a result, many of the variables that may affect
our revenues, cash flows and net income are not exclusively within our control.
WE ARE NOT ASSURED OF SUCCESSFUL DEVELOPMENT OF OUR PRODUCT PIPELINE.
We have twenty-two products at various stages of development or which are
not yet marketed. We have filed ANDAs relating to five of these products with
the FDA. FDA approval may not be granted for all or any of these products and we
may not be successful in filing NDAs or ANDAs for the remaining seventeen
products with the FDA.
WE DEPEND ON KEY SCIENTIFIC AND MANAGERIAL PERSONNEL FOR OUR CONTINUED SUCCESS.
Much of our success to date has resulted from the particular scientific and
management skills of personnel available to us. If these individuals were not
available, we might not be able to attract or retain employees with similar
skills. In particular, our success to date in developing new products has
resulted from the activities of a core group of research scientists. The
continued availability of this group is important to our ongoing success.
WE MUST SUCCESSFULLY INTEGRATE ANY BUSINESSES OR PRODUCTS THAT WE HAVE ACQUIRED
OR WILL ACQUIRE IN THE FUTURE.
In October 2000, we purchased 100% of DJ Pharma, Inc., which we renamed
Biovail Pharmaceuticals, Inc. In addition, we acquired the
Cardizem-Registered Trademark- family of products from Aventis
Pharmaceuticals Inc. effective December 29, 2000. Acquisitions involve the
integration of separate companies and product lines. This process of integration
may be disruptive to our business.
In addition, we may pursue product or business acquisitions that could
complement or expand our business. However, there can be no assurance that we
will be able to identify appropriate acquisition candidates in the future. If an
acquisition candidate is identified, there can be no assurance that we will be
able to successfully negotiate the terms of any such acquisition, finance such
acquisition or integrate such acquired product or business into our existing
products and business. Furthermore, the negotiation of potential acquisitions
could divert management's time and resources, and require significant resources
to consummate. If we consummate one or more significant acquisitions through the
issuance of common shares, holders of our common shares could suffer significant
dilution of their ownership interests.
See Item 4.B "-- Business Overview" for additional discussion regarding
products and businesses we acquired in fiscal 2000.
4
THE SUCCESS OF THE STRATEGIC INVESTMENTS WE MAKE DEPENDS UPON THE PERFORMANCE OF
THE COMPANIES WE INVEST IN, WHICH IS UNCERTAIN.
Economic, governmental, industry and internal company factors outside our
control affect each of the companies we may invest in. If these companies do not
succeed, the value of our assets and the market price of our common shares could
decline. Some of the material risks relating to the companies we may invest in
include:
- the ability of these companies to successfully develop and obtain
necessary governmental approvals for the products which serve as the basis
for our investments,
- the ability of competitors to develop similar or more effective products,
making the drugs developed by the companies we invest in difficult or
impossible to market,
- the ability of the companies we invest in to adequately secure patents for
their products and protect their proprietary information,
- the ability of these companies to enter the marketplace without infringing
upon competitors' patents,
- the ability of these companies to remain technologically competitive, and
the dependence of these companies upon key scientific and managerial
personnel.
We will have limited or no control over the resources that any company we
invest in may devote to developing the products we collaborate with them for.
Any company that we invest in may not perform as expected. These companies may
breach or terminate their agreements with us or otherwise fail to conduct
product discovery and development activities successfully or in a timely manner.
If any of these events occurs, it could have a material adverse effect on our
business.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY ENVIRONMENTAL LAWS AND REGULATIONS.
We may incur substantial costs to comply with such requirements. In
addition, we may discover currently unknown environmental problems or
conditions. We are subject to extensive federal, state, provincial and local
environmental laws and regulations which govern the discharge, emission,
storage, handling and disposal of a variety of substances that may be used in or
result from our operations. Environmental laws or regulations (or their
interpretation) may become more stringent in the future. Any such event could
have a material adverse effect on our business. We believe we are not currently
using any hazardous materials in the manufacture of our products.
OUR SECURITIES ARE SUBJECT TO MARKET PRICE VOLATILITY.
Market prices for the securities of pharmaceutical and biotechnology
companies, including our own, have historically been highly volatile, and the
market has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. Factors such as fluctuations in our operating results, the aftermath
of our public announcements, concern as to safety of drugs, and general market
conditions, can have an adverse effect on the market price of our securities.
OUR ABILITY TO OBTAIN THIRD-PARTY REIMBURSEMENT FOR THE COST OF PRODUCTS AND
RELATED TREATMENT MAY NOT BE ADEQUATE.
Our ability to successfully commercialize our products and product
candidates, if FDA approval is obtained, depends in part on whether appropriate
reimbursement levels for the cost of the products and related treatments are
obtained from government authorities and private health insurers and other
organizations, such as Health Maintenance Organizations ("HMOs") and Managed
Care Organizations ("MCOs").
Third-party payors increasingly challenge pricing of pharmaceutical
products. In addition, the trend toward managed health care in the United
States, the growth of organizations such as HMOs and MCOs and legislative
proposals to reform health care and government insurance programs could
significantly influence the purchase of pharmaceutical products, resulting in
lower prices and a reduction in product demand. Such cost containment measures
and health care reform could affect our ability to sell our products and may
have a material adverse effect on our business, results of operations and
financial condition.
5
Uncertainty exists about the reimbursement status of newly approved
pharmaceutical products. Reimbursement in the United States or foreign countries
may not be available for some of our products. Any reimbursement granted may not
be maintained or limits on reimbursement available from third-party payors may
reduce the demand for, or negatively affect the price of, those products. These
issues could have a material adverse effect on our business, results of
operations and financial condition. We are unable to predict if additional
legislation or regulation impacting the health care industry or third-party
coverage and reimbursement may be enacted in the future, or what effect such
legislation or regulation would have on our business.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY(1)
Biovail Corporation ("Biovail" or the "Company") is incorporated under the
Business Corporations Act (Ontario) R.S.O. 1990, as amended. Established on
March 29, 1994 as a result of the amalgamation of Trimel Corporation ("Trimel")
and its then subsidiary, Biovail Corporation International, the Company effected
an amalgamation on February 18, 2000 to change its name from Biovail Corporation
International to Biovail Corporation.(1)
B. BUSINESS OVERVIEW
We are an international, fully integrated pharmaceutical company with
special capabilities in the development, manufacture, sale and marketing of
branded pharmaceutical products. Building on our strengths in the development of
drugs utilizing advanced controlled-release and FlashDose technologies, our
primary business strategy is now to expand our sales and marketing presence in
the U.S. and Canada to support the commercialization of our product development
pipeline, which we intend to complement by the acquisition of established
pharmaceutical products and the in-licensing, from third parties, of products in
earlier stages of development. In pursuing product acquisitions, we seek to
capitalize on opportunities in the pharmaceutical industry arising from
consolidation initiatives being undertaken by larger companies in the industry.
We also intend to pursue attractive company acquisitions that will add to our
product offerings, product pipeline or sales and marketing capability in our
selected therapeutic areas.
We have proprietary technologies which we use to develop branded products
that (1) improve upon conventional multiple daily dose immediate-release forms
of existing products by providing the therapeutic benefits of controlled-release
drug delivery or (2) are enhanced dosage formats of existing medications that
provide superior patient convenience and product differentiation resulting from
the application of FlashDose, taste masking, and/or enhanced absorption
technologies. In addition, on a selective basis we develop products that are
generically equivalent to existing once-daily branded products. As a
fully-integrated company, we control all facets of the drug development process
from formulation development to clinical testing, manufacturing and obtaining
regulatory approval. This integrated approach results in operational synergies,
flexibility and cost efficiencies. Our primary market is the United States,
where we market our products directly through Biovail Pharmaceuticals Inc.
("BPI"), formerly DJ Pharma, Inc. ("DJ Pharma"), our recently acquired U.S sales
organization, and indirectly through our strategic licensing partners. In
Canada, we market our products directly through our Crystaal sales organization.
In other countries we market our products through strategic licensing partners.
We generate our revenues from: (1) developing and manufacturing oral controlled-
release and FlashDose products using our proprietary drug delivery technologies
for sale directly through our own sales organizations and through licensing
partners; (2) providing pharmaceutical contract research services to third
parties; and (3) royalties and/or licensing fees received from licensees related
to the sale under license of numerous controlled-release products. We do not
engage in basic research to discover New Chemical Entities ("NCEs").
Originally, we licensed our controlled-release products early in the
development cycle to pharmaceutical companies who controlled the clinical trial
and regulatory process, manufactured and sold our products in a
------------
(1) BIOVAIL, the Biovail word logo, Tiazac-Registered Trademark-,
Cardizem-Registered Trademark-, Viazem, CEFORM-Registered Trademark-,
Shearform-Registered Trademark-, and Crystaal are all trademarks of the
Company which may be registered in Canada, the United States and certain
other jurisdictions. All other product names referred to in this document
are the property of their respective owners.
6
number of international markets. More recently, we have developed, controlled
the clinical trial and regulatory process, manufactured, marketed and
out-licensed our own products once they have reached an advanced state of
development. We have developed eighteen controlled release products and one
FlashDose product to date that are currently sold under license in more than 55
countries. We manufacture seven of these products, Tiazac-Registered Trademark-,
Nurofen Meltlets and generic versions of Trental, Cardizem-Registered Trademark-
CD, Voltaren XR, Adalat CC and Procardia XL for sale by our licensees in the
United States and Europe. We also market a generic version of Verelan through
agreements with Mylan Pharmaceuticals Inc. ("Mylan") pending final approval by
the FDA of our product. Tiazac-Registered Trademark- and a number of other
brands are sold in Canada by Crystaal, our Canadian sales and marketing division
("Crystaal"). Prior to our acquisition of the Cardizem-Registered Trademark-
family of products from Aventis Pharmaceuticals Inc. ("Aventis") effective
December 29, 2000, Tiazac-Registered Trademark- was our principal product,
representing approximately 38% of product revenues for the year ended
December 31, 2000. We anticipate that in 2001 Cardizem-Registered Trademark-
branded products will constitute our principal product line. Through our
acquisition of DJ Pharma, we acquired the rights to Keftab, Rondec and Cedax.
These products are indicated for skin/soft tissue infections and for the
treatment of allergy and respiratory conditions.
Our pipeline products fall into three categories. The first category,
representing near to mid-term opportunities, is branded controlled-release
once-daily versions of four existing multi-dose products and a once-daily
immediate-release product (citalopram), indicated for the treatment of chronic
disorders such as depression, anxiety, smoking cessation, pain management and
diabetes, and Cardizem-Registered Trademark- XL, a therapeutically superior
once-daily diltiazam product. The second category, representing mid to long-term
opportunities, is branded FlashDose versions of eight existing orally
administered pharmaceutical products. The third category, representing near-term
opportunities, covers select generic controlled-release versions of major brand
name drugs, in particular, products indicated for the treatment of chronic
disorders such as cardiovascular and anti-arthritic conditions, and for pain
management.
The following table sets out the indication, partner status and development
status of our development pipeline and portfolio of marketed products.
PRODUCT INDICATION PARTNER STATUS CURRENT STATUS
-------------------- --------------------- --------------------- ---------------------
I. BRANDED
DEVELOPMENTAL Buspirone(1) Anxiety, Depression Partnering Phase III
PORTFOLIO Opportunity
Bupropion(1) Depression, Smoking Partnering Under Development
Cessation Opportunity
Metformin(1) Diabetes Partnering Under Development
Opportunity
Tramadol(1) Chronic Pain Partnering Phase III
Opportunity
Citalopram(1) Depression H. Lundbeck A/S Phase III
Cardizem-Registered Trademark- Hypertension/Angina Partnering Approved
XL(1) Opportunity
Paroxetine(1)(6) Depression/Anxiety Partnering Phase I
Opportunity
Zolpidem(1)(6) Sleep Disorders Partnering Phase I
Opportunity
BIOVAIL Keftab(3) Skin and Soft Tissue Eli Lilly & Company Commercialized
PHARMACEUTICALS Infections
Cedax(3) Respiratory Schering-Plough Commercialized
Infections Corporation
Rondec(3) Respiratory/Allergy Abbott Laboratories Commercialized
Cardizem-Registered Trademark-(7) Hypertension, Angina Aventis Commercialized
CRYSTAAL PRODUCTS Tiazac-Registered Trademark- Hypertension, Angina N/A Commercialized
(1)(2)
Retavase(3) Acute Myocardial Centacor, Inc. Commercialized
Infarction
7
PRODUCT INDICATION PARTNER STATUS CURRENT STATUS
-------------------- --------------------- --------------------- ---------------------
Celexa(3)(5) Depression Lundbeck Canada Inc. Commercialized
Cardizem-Registered Trademark-(7) Hypertension, Angina Aventis Commercialized
Brexidol(3) Acute Pain Chiesi Commercialized
Farmaceutici S.p.A.
Cardiac STATus(3) Diagnosis of Spectral Commercialized
Myocardial Infarction Diagnostics Inc.
Monocor(3) Hypertension, Wyeth Ayerst Commercialized
"C.H.F." Canada Inc.
Attenade(3)(4) Attention Deficit- Celgene Corporation Phase III(4)
Hyperactivity
Disorder
Ampligen(3)(4) Chronic Fatigue Hemispherx Under Development(4)
Syndrome Biopharma, Inc.
Fibrostat(3)(4) Surgical Scars and Procyon Under Development(4)
Burns BioPharma Inc.
II. GENERIC PRODUCTS
Trental(1) Peripheral Vascular Teva Pharmaceuticals Commercialized
Disease USA Inc.
Cardizem-Registered Trademark- Hypertension/Angina Teva Pharmaceuticals Commercialized
CD(1) USA Inc.
Verelan(1)(3) Hypertension/Angina Teva Pharmaceuticals Commercialized
USA Inc.
Voltaren XR(1) Arthritis Teva Pharmaceuticals Commercialized
USA Inc.
Adalat CC(1)(3) Hypertension/Angina Teva Pharmaceuticals Commercialized
USA Inc.
Procardia XL(1) Hypertension/Angina Teva Pharmaceuticals Commercialized
USA Inc.
Dilacor XR(1) Hypertension/Angina Teva Pharmaceuticals Regulatory Review
USA Inc.
Tegretol(1) Epilepsy Teva Pharmaceuticals Regulatory Review
USA Inc.
-------------
(1) Developed by Biovail.
(2) Tiazac-Registered Trademark- is also promoted and distributed in the
U.S. by licensee Forest Laboratories Inc.
(3) In-licensed from partner.
(4) Being developed by a Biovail partner.
(5) Co-promoted with Lundbeck Canada Inc.
(6) FlashDose product (six further products undisclosed).
(7) Cardizem-Registered Trademark- family of products acquired from Aventis in
December 2000.
N.B. Biovail has also developed 11 additional products that have been
successfully commercialized by various licensees in numerous world markets.
Five generic versions of branded controlled-release drugs in our pipeline
have been submitted and are awaiting regulatory approval in the United States
from the FDA. These five products include generic formulations of Verelan,
Adalat CC(90mg), Procardia XL(90mg) and Dilacor XR, all of which are calcium
channel blockers used for the treatment of hypertension and/or angina. Tegratol
(400mg) is indicated for epilepsy and is also awaiting approval. Historically,
the FDA reviews and approves these generic products in an average eighteen month
timeframe, unless the generic filer is subject to patent infringement litigation
by the
8
innovator, in which case the FDA is precluded from approving the product until
the earlier of thirty months or settlement of the patent infringement
litigation. These five generic pipeline products had aggregate U.S. sales of
approximately $383 million (including generics) for the twelve months ended
December 31, 2000. Once approved, these products will be marketed in the United
States by Teva Pharmaceutical USA, Inc. (together with its affiliates, "Teva").
In addition, we market a generic version of Verelan through our licensee Teva as
a result of our agreements with Mylan.
In July 1997, Intelligent Polymers Limited ("Intelligent Polymers") was
formed primarily to develop once-daily controlled-release branded versions of
selected drugs whose chemical patents and/or exclusivity periods have or are
about to expire and which are currently marketed only in immediate-release form,
or in controlled-release form requiring multiple daily dosing. We expect that
such products will be marketed under distinct brand names. In an initial public
offering in October 1997, 100% of the common shares of Intelligent Polymers were
sold to the public. At any time prior to October 2002, as the holder of a class
of special shares of Intelligent Polymers, we had the right to buy from the
public holders all, but not less than all, of Intelligent Polymers' common
shares with cash, our stock or a combination of both. This option was
subsequently sold to IPL Acquireco 2000 Ltd., ("IPL Acquireco") a company
controlled by a private investor group. As consideration for this sale, we
obtained an option to acquire IPL Acquireco. On September 29, 2000 IPL Acquireco
exercised its option to purchase all of the common shares of Intelligent
Polymers for $39.06 per share, payable in cash. Prior to September 29, 2000,
Intelligent Polymers did not perform any research or other activities on its own
behalf, but rather contracted with us to perform all such activities. Subsequent
to September 29, 2000, Intelligent Polymers took over the development of its
products, including directly contracting with, and making payments to, third
parties. On December 29, 2000, we exercised our option to purchase the then
current equity holders' interest in IPL Acquireco such that we now own 100% of
Intelligent Polymers.
In December 1998, we entered into a multi-faceted ten-year agreement with H.
Lundbeck A/S of Copenhagen ("Lundbeck") for the development of a novel
controlled-release formulation of the anti-depressant citalopram, marketed under
the trademark Celexa in the United States. Under the agreement, we will develop,
manufacture and supply a controlled-release version of citalopram for commercial
sale by Lundbeck or its licensees worldwide. In exchange, Lundbeck will pay us
product development fees and an agreed upon supply price upon commercialization
of the controlled-release citalopram product.
In November 1999 we completed the acquisition of Fuisz Technologies Ltd.
("Fuisz"), subsequently renamed Biovail Technologies Limited ("BTL"), for
consideration of $177.9 million including costs. Fuisz was engaged in the
development, manufacture and commercialization of drug delivery products,
nutraceutical and food ingredient products. The acquisition was effected through
a two stage transaction comprising a cash tender offer and purchase of 49% of
Fuisz' outstanding common stock for consideration of $75.6 million and
acquisition of Fuisz' remaining common stock through issuance of 1,544,155 of
our own shares (pre-split) with a fair value of $96.0 million. The acquisition
of Fuisz has given us several proprietary drug delivery technologies, including
taste masking, rapid dissolve and enhanced absorption, which we are applying in
the development of FlashDose versions of several oral dosage, controlled-release
branded products. During 2000 we consolidated our research and development
activities at BTL's Chantilly, Virginia location.
In October 2000, we purchased 100% of DJ Pharma, a U.S. pharmaceutical sales
and marketing company with approximately 300 sales representatives and several
drug brands. The purchase price was $165.1 million in cash plus the assumption
of approximately $34 million of debt and license obligations. DJ Pharma marketed
and sold branded products to physicians for the treatment of respiratory and
allergy conditions and skin and soft tissue infections. DJ Pharma's strategy had
been to obtain marketing rights to products that had been under-promoted by
originator companies such as Eli Lilly and Co., Schering-Plough and Abbott
Laboratories, increase the promotional activity and thereby increase revenues
for the product. We have consolidated DJ Pharma's operations at its Raleigh,
North Carolina, facility. We are establishing an expanded sales/marketing
structure there in anticipation of growth in the sales force from 300 to 800
representatives by mid 2002.
On December 29, 2000, through our wholly owned subsidiary Biovail
Laboratories Incorporated ("BLI"), we spent $239.5 million as an initial payment
for, and will spend a further $170 million during 2001 to acquire the rights to
and benefits from, the Cardizem-Registered Trademark- family of products for the
Canadian, U.S. and Puerto Rican markets from Aventis.
Cardizem-Registered Trademark- branded products have been a leading line in the
calcium channel blocker
9
category of cardiovascular drugs for approximately twenty years.
Cardizem-Registered Trademark- is used to treat hypertension and angina. In
2000, Cardizem-Registered Trademark- CD (branded and generic) was the leading
once-daily diltiazem product in this category with approximately 13.7 million
prescriptions dispensed in the U.S. Aventis' branded
Cardizem-Registered Trademark- CD accounted for approximately 4.6 million of
this total while the balance of prescriptions was filled by generic versions,
one of which is our own generic product sold through Teva. Under transitional
arrangements with Aventis, Cardizem-Registered Trademark- CD is being
manufactured on our behalf by Aventis.
Crystaal, performs sales and marketing activities in Canada for our products
as well as for products licensed from third parties. Crystaal is dedicated to
providing high quality, cost effective branded pharmaceuticals to Canadian
health care professionals and their patients. Crystaal's product portfolio
strategy is to focus on drugs for the primary care market, including medications
for the treatment of cardiovascular disorders as well as drugs for the treatment
of central nervous system and neurological disorders. All three areas represent
rapidly growing market segments. We believe our strategy of acquiring exclusive
licenses from third parties to sell branded drug products, combined with our
portfolio of existing and future controlled-release and FlashDose branded
products, provides Crystaal with an opportunity to become a significant
marketing presence in the Canadian market.
We also have a full-service Contract Research Division ("CRD") that provides
clinical research and laboratory testing services for our product development
projects and for third-party international and domestic pharmaceutical
companies. The CRD includes a full-service bioanalytical laboratory which
performs specialized bioanalytical and quality control testing and method
development as well as other laboratory services. The CRD can also provide
support services to its clients in the area of quality control. The CRD operates
in a facility that includes a fully equipped bioanalytical laboratory, a
department of biopharmaceutics and statistical analysis and a live-in 216-bed
study clinic.
In addition, through a subsidiary company, Nutravail Technologies, Inc., we
develop and manufacture nutraceutical and food ingredient products incorporating
our proprietary technologies. Large-scale manufacture of nutraceutical products
is currently handled through third party contractors but a variety of higher
value flavour encapsulations, gums and gum bases is developed and manufactured
at our Sterling, Virginia facility.
Our strategic focus is now on expanding our sales and marketing presence in
the U.S. and Canada by in licensing or acquiring products and commercializing
products from our own development pipeline for BPI and Crystaal.
We also intend to selectively pursue strategic investments and alliances
with small to medium-sized pharmaceutical companies that require additional
capital to sustain specific NCE projects in various stages of development as
well as to fund the completion of development of novel products utilizing
advanced drug delivery systems. In exchange for our investments, we expect to
acquire various rights, options and licenses with respect to the marketing and
distribution of drugs and technologies derived from these projects.
INDUSTRY OVERVIEW
IMS Healthcare reports that the total prescription drug market in the
U.S. was approximately $130 billion in 2000, an increase of 13.7% over the prior
year, while the oral controlled-release segment of this market was approximately
$9.2 billion for that period and growing at a faster rate.
10
Controlled-release products are formulated to release the drug's active
ingredient gradually and predictably over a 12 to 24 hour period. These
formulations provide for (1) greater effectiveness in the treatment of chronic
conditions resulting from a more consistent delivery of medication over time;
(2) reduced side effects; (3) greater convenience (only taken once or twice a
day) and (4) higher levels of patient compliance due to a simplified dosing
schedule as compared to immediate-release dosage form.
There are significant technical barriers associated with the development of
controlled-release drugs, with only a limited number of companies possessing the
technical expertise and technology to develop controlled release products.
Despite the therapeutic advantages of controlled-release drugs versus their
immediate-release counterparts, many pharmaceutical companies typically have not
made the additional investment required to develop a controlled-release version
of a product while their immediate-release version is under patent. Many
pharmaceutical companies are now seeking to extend their patents and protect
their franchise.
Over the next several years, branded products with 1999 sales of over
$40 billion will lose patent protection. Application of controlled-release and
other technologies to branded products represents substantial revenue
opportunities. The owners of these branded drugs will develop strategies to
defend themselves against generic competition and seek innovative approaches to
extend product life-cycles, exclusivity periods and product differentiation.
Drug delivery technologies such as fast dissolve tablets and controlled-release
drugs are important product differentiations that produce increased patient
compliance, reduction, in side effect profile and convenience.
PRODUCTS OF BIOVAIL
LICENSED AND MARKETED PRODUCTS
We are currently benefiting from direct sales and the sales by various
licencees of twenty-eight pharmaceutical products. We have developed nineteen
controlled-release drugs which are currently marketed through licensees and, in
the case of Tiazac-Registered Trademark-, directly in Canada through our
marketing division Crystaal. Of these nineteen drugs, we manufacture seven:
Tiazac-Registered Trademark- Nurofen Meltlets, generic formulations of Trental,
Cardizem-Registered Trademark- CD, Voltaren XR, Adalat CC and Procardia XL for
sale by our licensees in the United States and Europe. In the case of Adalat CC,
we market our own 60mg version of this product and market the 30mg version under
license from Elan. A further product, Verelan, is marketed under agreements with
Mylan pursuant to which Mylan will manufacture all of our requirements for
Verelan until our version of the product is approved. See "-- Generic Product
Pipeline -- Generic Version of Verelan." The eleven remaining drugs are
manufactured and commercialized by licencees in numerous world markets.
We have also developed a FlashDose form of ibuprofen utilizing technology
obtained through our 1999 acquisition of Fuisz. We manufacture this product for
Boots Healthcare International for sale in the United Kingdom under the name of
Nurofen Meltlets.
The following table sets forth the eight controlled-release products
(including Verelan) that we have developed and are currently licensed and
marketed. These formulations have been designed for once-daily dosing unless
otherwise specified. Also listed are our first FlashDose product, Nurofen
Meltlets, the five products licensed to and marketed by Crystaal and the three
products licensed to and marketed by BPI. Except for
Tiazac-Registered Trademark- and Cardizem-Registered Trademark-, which are
registered trademarks, the trade names for the pharmaceutical products described
below and elsewhere in this Form 20-F are the property of (and may be registered
trademarks of) our licensees and marketing partners or others.
PRODUCTS CHEMICAL INDICATION PRINCIPAL LICENSEE/LICENSOR
-------- -------------- ----------------------- -----------------------------------
MANUFACTURED BY BIOVAIL
Tiazac-Registered Trademark-... Diltiazem hypertension/angina Forest Laboratories, Inc (U.S.),
various international licensees,
Crystaal in Canada
Trental(1)............... Pentoxifylline peripheral arterial Teva (U.S.)
disease
Cardizem-Registered Trademark- Diltiazem hypertension/angina Teva (U.S.)
CD(1)..................
11
PRODUCTS CHEMICAL INDICATION PRINCIPAL LICENSEE/LICENSOR
-------- -------------- ----------------------- -----------------------------------
Voltaren XR(1)........... Diclofenac osteoarthritis/rheuma- Teva (U.S.)
toid arthritis
Adalat CC (60mg)(1)...... Nifedipine hypertension/angina Teva (U.S.)
Procardia XL(1).......... Nifedepine hypertension/angina Teva (U.S)
Nurofen Meltlets(2)...... Ibuprofen headache, mild pain Boots Healthcare International
(U.K.)
MANUFACTURED BY OTHERS
Cardizem-Registered Trademark- Diltiazem hypertension/angina Manufactured by Aventis
(branded)..............
Verelan(3)............... Verapamil hypertension/angina Teva (U.S.)
IN-LICENSED AND MARKETED BY CRYSTAAL IN CANADA
Celexa................... Citalopram Depression Lundbeck A/S
Retavase................. Reteplase acute myocardial Centocor Inc.
recombinant infarction
Brexidol................. Piroxicam-- acute pain Chiesi Farmaceutici S.p.A.
cyclodextrin
Cardiac STATus........... diagnosis of myocardial Spectral Diagnostics Inc.
infarction
Monocor.................. Bisoprolol hypertension, "C.H.F." Wyeth Ayerst Canada Inc.
fumarate
IN-LICENSED AND MARKETED BY BPI IN THE U.S.
Keftab................... Cephalexin HCl skin/soft tissue Eli Lilly & Company
infections
Cedax.................... Ceftibuten respiratory infections Schering-Plough Corpn.
Rondec................... Combination allergy/respiratory Abbott Laboratories
------------
(1) Generic version
(2) Once every four hours dosing
(3) Under agreement with Mylan, Mylan will manufacture all of our requirements
for Verelan until approval of our version of the product.
(4) We have developed 11 additional products that have been commercialized by
various licensees in numerous world markets.
BRANDED PRODUCTS
TIAZAC-REGISTERED TRADEMARK- (DILTIAZEM)
Until December 31, 2000 our principal product was
Tiazac-Registered Trademark-, accounting for approximately 38% of total product
revenues for the year ended December 31, 2000. During this period, all revenue
related to Tiazac-Registered Trademark- was generated through our licensing
agreements with Forest Laboratories Inc. ("Forest") and European licensees and
sales made by Crystaal.
Tiazac-Registered Trademark- belongs to a class of drugs used in the
treatment of hypertension and angina called calcium channel blockers, which
generated U.S. sales of $3.8 billion for the twelve months ended December 31,
2000. Within the market for calcium channel blockers, diltiazem-related
once-daily products accounted for approximately $823 million of U.S. sales for
the twelve months ended December 31, 2000 the largest portions of which are
represented by Cardizem-Registered Trademark- CD ($544 million, including
generics) and Dilacor XR ($75 million, including generics).
Tiazac-Registered Trademark- is another once-daily branded diltiazem product.
Since we introduced Tiazac-Registered Trademark- in the United States in
February 1996, Tiazac-Registered Trademark-'s market share has increased as a
percentage of total prescriptions in the once-daily diltiazem market, to
approximately 19% by the end of 2000. There can be no assurance that such levels
of growth can be sustained.
12
Tiazac-Registered Trademark- has several advantages over other formulations
of diltiazem, including (1) a much smaller capsule size; (2) a wider dosing
range (approved for a maximum daily dose up to 540 mg); (3) lower pricing; and
(4) labeling which specifically permits physicians to switch patients to
Tiazac-Registered Trademark- from Cardizem-Registered Trademark- CD at the
nearest equivalent daily dose. An NDA for Tiazac-Registered Trademark- was
approved by the FDA in September 1995 and by Health Canada's Therapeutic
Products Program ("TPP") in April 1997.
We licensed the right to market Tiazac-Registered Trademark- in the U.S. to
Forest in September 1995 and the formal product launch took place in
February 1996. Our license agreement with Forest provides us with a royalty
payment of 8% of net sales for 16 years, commencing December 1995. In addition,
under our 16-year supply agreement with Forest, we act as the exclusive
manufacturer of Tiazac-Registered Trademark- and receive contractually
determined manufacturing fees.
In Canada, Crystaal currently markets Tiazac-Registered Trademark- through
its field force which has grown to over 75 representatives, under the direction
of a marketing and sales management team located at our headquarters in
Mississauga, Ontario, Canada. Tiazac-Registered Trademark- has been accepted on
the provincial drug formularies in each of the provinces of Canada, thereby
making it eligible for reimbursement by the provincial government health plan in
all provinces.
Tiazac-Registered Trademark- is marketed under the trade name Viazem XL and
under other trademarks in Europe. It is licensed to Stada Arzneimittel AG
("Stada") in the United Kingdom and Ireland; Stada, Ratiopharm GmbH and
Heumann GmbH in Germany; Zambon B.V. in The Netherlands; A/S GEA Farmaceutisk
Fabrik in Denmark, Sweden and Finland and Crinos S.p.A. in Italy. We have also
licensed the product to two companies in South America and a company in
Australia.
Generic competition for Tiazac-Registered Trademark- was expected during the
first quarter of 2001. We are currently involved in litigation which could delay
the Andrx Group's launch of its generic version of Tiazac-Registered Trademark-
for up to 30 months. (See Item 8.A. "Litigation")
CARDIZEM-REGISTERED TRADEMARK- BRANDED PRODUCTS (DILTIAZEM)
Cardizem-Registered Trademark- branded products have been a leading line in
the calcium channel blocker category of cardiovascular drugs for approximately
20 years. Cardizem-Registered Trademark- is used to treat hypertension and
angina. In 2000, Cardizem-Registered Trademark- CD (branded and generic) was the
leading once-daily diltiazem product in this category with approximately
13.7 million prescriptions dispensed in the US, with a value of $544 million for
the year ended December 31, 2000. Aventis' branded
Cardizem-Registered Trademark- CD accounted for approximately 4.6 million of
this total while the balance of prescriptions was filled by generic versions,
one of which is our own generic product sold through Teva. Due to the
genericization of this product, we are not actively promoting the
Cardizem-Registered Trademark- CD branded product. We are currently developing
Cardizem-Registered Trademark- XL, an evening administration version of
Cardizem-Registered Trademark- CD. (See "Branded Product
Pipeline -- Cardizem-Registered Trademark- XL.")
GENERIC PRODUCTS
TRENTAL (PENTOXIFYLLINE)
A three times a day timed-release formulation of pentoxifylline, introduced
in September 1994 by Hoechst Marion Roussel, is marketed in the United States
under the trade name Trental. Trental is used in the treatment of patients with
peripheral vascular disease. U.S. sales of Trental and generic formulations of
pentoxifylline were approximately $62 million in the twelve months ended
December 31, 2000. Competitors' generic versions of Trental were launched in
August 1997. We received approval of our generic version of Trental in
July 1998 and market this product in the United States through our licensee,
Teva.
CARDIZEM-REGISTERED TRADEMARK- CD (DILTIAZEM)
A three to four times daily immediate-release formulation of diltiazem,
introduced in November 1982 by Hoechst Marion Roussel, was marketed in the
United States under the brand name Cardizem-Registered Trademark-. Hoechst
Marion Roussel introduced a controlled-release once daily version in
August 1992 under the brand name Cardizem-Registered Trademark- CD. U.S. sales
of Cardizem-Registered Trademark- CD were approximately $544 million (including
generics) for the twelve months ended December 31, 2000.
13
We received approval of our generic version of
Cardizem-Registered Trademark- CD in December 1999 and we market this product in
the United States through our licensee, Teva. Tiazac-Registered Trademark-,
although a once-daily diltiazem formulation, is not a generic for
Cardizem-Registered Trademark- CD because it has a different release profile and
is marketed as a branded version of diltiazem, not as a generic for
Cardizem-Registered Trademark- CD.
VOLTAREN XR (DICLOFENAC)
A two to three times daily delayed-release enteric coated formulation of
diclofenac, introduced in July 1988 by Ciba-Geigy Corporation, is marketed in
the United States under the brand name Voltaren. Ciba-Geigy Corporation received
approval from the FDA for a controlled-release version and began marketing this
product in April 1996 under the brand name Voltaren XR. U.S. sales of Voltaren
XR were approximately $57 million for the twelve months ended December 31, 2000.
Today the marketer of Voltaren XR is Novartis Pharmaceuticals Corporation as a
result of the Ciba-Geigy Corporation/Sandoz Pharmaceuticals Corporation merger.
We received approval for our generic version of Voltaren XR in February 2000 and
market this product in the U.S. through our licensee, Teva.
ADALAT CC (NIFEDEPINE)
A three to four times daily immediate-release formulation of nifedipine,
introduced in January 1985 by Bayer, is marketed in the United States under the
brand name Adalat. Bayer received approval from the FDA for a controlled-release
version in April 1993 and markets the product under the brand name Adalat CC.
U.S. sales of Adalat CC, including our generic, were approximately $441 million
for the twelve months ended December 31, 2000. We received final approvals from
the FDA in March 2000 and November 2000 respectively for an in-licensed 30 mg
generic version and our own 60 mg. generic version of Adalat CC. We market both
these products in the United States through our licensee, Teva. We were the
first company to file an ANDA for the 60 mg. strength of Adalat CC and we are
therefore entitled to 180 days of marketing exclusivity. Elan Corporation plc
("Elan") was the first to file an ANDA for the 30 mg. strength. We have entered
into an agreement with Elan giving us exclusive marketing rights for the United
States for Elan's generic versions of Adalat CC. In January 2001 we announced
the filing of an ANDA in respect of our 90mg strength of Adalat CC.
PROCARDIA XL (NIFEDIPINE)
A three to four times daily immediate-release formulation of nifedipine,
introduced in January 1982 by Pfizer Inc. ("Pfizer"), is marketed in the United
States under the brand name Procardia. Pfizer introduced a controlled-release
version in September 1989 under the brand name Procardia XL. U.S. sales of
Procardia XL including generics were approximately $447 million for the twelve
months ended December 31, 2000.
We developed a generic version of Procardia XL on behalf of Intelligent
Polymers in multiple strengths and filed an ANDA in the first quarter of 1998.
Prior to this filing, Mylan filed an ANDA for the 30mg. strength only and
subsequently filed for 60mg and 90mg strengths. We received final approval from
the FDA for our 60mg and 30mg strengths in September 2000 and February 2001
respectively and we are currently marketing these strengths through Teva in the
United States. We filed an ANDA in respect of the 90mg strength of Procardia XL
in January 2001.
NUROFEN MELTLETS (IBUPROFEN FLASHDOSE)
Ibuprofen is a long established over-the-counter analgesic medication. We
applied our proprietary FlashDose and taste-masking technology to this compound
to develop a revolutionary new form of ibuprofen. Dosage is similar to other
ibuprofen products, namely, two tablets every four hours to a maximum of six
tablets in twenty-four hours. The melt-in-the-mouth tablets can be taken
anytime, anywhere without water. In April 2000 we launched this new product in
the U.K. through Boots Healthcare International under the Nurofen brand as a
means of validating and demonstrating the technology. The product was launched
in the Australian market in early 2001.
14
BRANDED PRODUCTS MARKETED BY CRYSTAAL
In addition to Tiazac-Registered Trademark-, Crystaal's portfolio includes
five selected in-licensed products which are promoted by our nationwide sales
force of over 75 representatives.
CELEXA (CITALOPRAM)
Crystaal co-promotes the immediate-release version of Celexa in
collaboration with Lundbeck Canada Inc. Citalopram has been proved to be
effective in the treatment of depression and belongs to a class of drugs known
as Selective Seratonin Reuptake Inhibitors ("SSRIs"). SSRIs have been shown to
have fewer side effects and a lower incidence of drug interactions when taken
concurrently with other medications than earlier antidepressant products, which
accounts for the significant growth in this market. The Canadian market for
antidepressants for the year ended December 31, 2000 was approximately
U.S.$ 367 million, an increase of 14% over the previous year.
RETEVASE (RETEPLASE RECOMBINANT)
Retavase, licensed from Centocor Inc., is a tissue plasmogen activator used
in thrombolytic therapy. The medication is administered to patients immediately
after the incidence of acute myocardial infarction ("AMI" or heart attack) and
acts to clear arterial blockage. The thrombolytic market in Canada for the year
ended December 31, 2001 was estimated to be approximately U.S $29 million an
increase of 10% over the previous year.
BREXIDOL (PIROXICAM--CYCLODEXTRIN)
Brexidol, licensed from Chiesi Farmaceutici S.p.A., belongs to a class of
drugs known as NSAIDs (a non-steroidal anti-inflamatory drugs) and is indicated
for the relief of acute pain. Brexidol is of particular value in the treatment
of sports injuries that tend to be of short-term duration.
CARDIAC STATUS (CARDIAC MARKER)
The evaluation of chest pain is one of the most challenging problems in
emergency care. Physical examination and electrocardiogram procedures are not
always appropriate and can result in a significant percentage of acute
myocardial infractions going undetected. Cardiac STATus is a point of care
("POC") cardiac marker used in determining whether a patient admitted to
hospital with chest pain has indeed suffered a heart attack. The Canadian
cardiac marker market (POC and laboratory based) for the year ended
December 31, 2000 is estimated at approximately U.S. $24 million. The cardiac
marker segment is currently underdeveloped and is poised for rapid expansion.
MONOCOR (BISOPROLOL FUMARATE)
Monocor is a cardio-selective beta-blocker indicated for the treatment of
mild to moderate hypertension and congestive heart failure. The beta-blocker
market in Canada is valued at approximately U.S.$87 million and is growing
annually at the rate of 5%.
BRANDED PRODUCTS MARKETED BY BIOVAIL PHARMACEUTICALS INC.
BPI (formerly DJ Pharma Inc.) markets and sells several branded products to
physicians for the treatment of respiratory and allergy conditions and skin and
soft tissue infections. DJ Pharma's strategy was to in-license drugs that were
being under-promoted by their large pharmaceutical company originators, increase
the promotion effort and thereby increase sales. We do not manufacture any of
these products.
CEDAX (CEFTIBUTEN)
Cedax is a patented, third generation, broad spectrum oral cephalosporin
antibiotic indicated for the treatment of chronic bronchitis, otitis media and
pharyngitis/tonsilitis. Cedax was launched by Schering-Plough in 1996 and
achieved peak sales in 1996 of $45 million. Schering-Plough manufactures the
product for us.
15
RONDEC (CARBINOXAMINE/PSEUDOEPHEDRINE)
Rondec is a prescription decongestant indicated for relief of nasal
congestion associated with allergy or the common cold. Rondec was developed by
Abbott laboratories and acquired from Dura Pharmaceuticals. In 2000 the product
achieved sales of $18 million.
KEFTAB (CEPHALEXIN HCL)
Keftab, is a first generation cephalosporin antibiotic, indicated for skin
and soft tissue infections and was distributed by BPI under license from Eli
Lilly & Co. up to March 7, 2001. The product was subject to voluntary recall by
the manufacturer on March 7, 2001.
We are actively pursuing further opportunities to increase BPI's range of
marketed products through in-licensing or acquiring products from large
pharmaceutical companies.
GENERIC PRODUCT PIPELINE
We have a pipeline of generic versions of branded products, including five
for which we have filed ANDAs with the FDA. Collectively, the branded versions
of the filed strengths of these five products generated approximately
$383 million in U.S. sales in the twelve months ended December 31, 2000.
The controlled-release drugs in our generic product pipeline are used
primarily in the treatment of chronic conditions in the cardiovascular and bone
and joint disease areas and for pain management, conditions for which
controlled-release formulations provide significant clinical and economic
benefits.
We expect to price our generic products at a discount to branded products.
However, because of the technological barriers associated with developing
controlled-release products, we do not expect our generic products to experience
as much price erosion as immediate-release generic products, which are easier to
duplicate.
The following chart presents information for the twelve months ended
December 31, 2000 with respect to the branded versions of the five ANDAs that we
have filed with the FDA.
TOTAL U.S. PRODUCT
CURRENTLY MARKETED BRAND NAME FILING DATE INDICATION SALES(IN MILLIONS)(1)
----------------------------- ----------- -------------------- ---------------------
Verelan(2)...................................... 1997 angina, hypertension $ 60
Dilacor XR...................................... 1998 angina, hypertension 75
Procardia XL 90mg............................... 2000 angina, hypertension 106
Adalat CC 90mg.................................. 2000 hypertension 106
Tegratol 400mg.................................. 2000 Epilepsy 36
------------
(1) Includes brand and generics.
(2) We are marketing this product under agreement with Mylan. See "-- Generic
Version of Verelan."
GENERIC VERSION OF VERELAN (VERAPAMIL)
A three to four times daily immediate-release formulation of verapamil,
originally introduced in March 1982 by Knoll Pharmaceuticals, is marketed in the
United States. Lederle Laboratories received approval for a controlled-release
version in May 1990 and markets the product under the brand name Verelan.
U.S. sales of Verelan were approximately $60 million (including generics) for
the twelve months ended December 31, 2000.
We filed an ANDA for the generic version of Verelan in the second quarter of
1997. In March 1999, we entered into agreements with Mylan for the marketing of
all dosages of a generic version of Verelan using our ANDA first filer status
and Mylan's product approval, which was granted on April 22, 1999. Mylan will
manufacture all of our requirements for Verelan until our product approval. We
market this product through our licensee, Teva, and Mylan independently markets
and prices this product on its own behalf.
16
GENERIC VERSION OF DILACOR XR (DILTIAZEM)
A once daily controlled-release formulation of diltiazem, introduced in
June 1992 by Rhone-Poulenc Rorer, Inc., is marketed in the U.S. by Watson
Pharmaceuticals, Inc. under the brand name Dilacor XR. U.S. sales of Dilacor XR
were approximately $75 million (including generics) for the twelve months ended
December 31, 2000.
We filed an ANDA for the generic version of Dilacor XR in the third quarter
of 1998.
GENERIC VERSION OF PROCARDIA XL (NIFEDEPINE)
A three to four times daily immediate-release formulation of nifedipine,
introduced in January 1982 by Pfizer Inc. ("Pfizer"), is marketed in the United
States under the brand name Procardia. Pfizer introduced a controlled-release
version in September 1989 under the brand name Procardia XL. U.S. sales of
Procardia XL were approximately $447 million for the twelve months ended
December 31, 2000.
We developed our generic version of Procardia XL on behalf of Intelligent
Polymers that includes multiple strengths and filed an ANDA in the first quarter
of 1998. Prior to this filing, Mylan filed an ANDA for the 30 mg strength only
and subsequently filed for 60mg and 90mg strengths. We received final approval
from the FDA for our 60mg and 30mg strengths in September 2000 and
February 2001 respectively and we are currently marketing these strengths
through Teva in the United States. We filed an ANDA in respect of the 90mg
strength of Procardia XL in January 2001.
GENERIC VERSION OF ADALAT CC (NIFEDEPINE)
A three to four times daily immediate-release formulation of nifedipine,
introduced in January 1985 by Bayer, is marketed in the United States under the
brand name Adalat. Bayer received approval from the FDA for a
controlled -- release version in April 1993 and markets the product under the
brand name Adalat CC. U.S. sales of Adalat CC were approximately $441 million
for the twelve months ended December 31, 2000.
We received final approvals from the FDA in March 2000 and December 2000
respectively for an in-licensed 30 mg generic version and our own 60 mg. generic
version of Adalat CC. We market both these products in the United States through
our licensee, Teva. We were the first company to file an ANDA for the 60 mg.
strength of Adalat CC and we are therefore entitled to 180 days of marketing
exclusivity. Elan was the first to file an ANDA for the 30 mg. strength. We have
entered into an agreement with Elan giving us exclusive marketing rights for the
United States for Elan's generic versions of Adalat CC. In January 2001 we
announced the filing of an ANDA in respect of our 90mg strength of Adalat CC.
GENERIC VERSION OF TEGRETOL XR (CARBAMAZIPINE)
A 2 to 3 times daily immediate-release formulation of carbamazipine,
introduced in November 1976 by Novartis, is marketed in the United States under
the brand name Tegretol. Novartis received approval from the FDA for a
controlled- release version in July 1996 and markets the product under the brand
name Tegretol XR. U.S. Sales of Tegretol XR were approximately $71 million for
the twelve months ended December 31, 2000.
17
BRANDED PRODUCT PIPELINE
We are working to develop once-daily controlled-release branded versions of
the following compounds which had aggregate U.S. sales of approximately
$4.2 billion for the twelve months ended December 31, 2000:
CURRENTLY MARKETED TOTAL U.S. PRODUCT
COMPOUND BRAND NAME U.S. MARKETER INDICATION SALES(IN MILLIONS)(1)
-------- ------------------ -------------------- -------------------- ---------------------
Bupropion............ Wellbutrin SR/ Glaxo Wellcome depression, smoking $ 874
Zyban cessation
Buspirone............ Buspar Bristol-Myers Squibb anxiety, depression 674
Metformin............ Glucophage Bristol-Myers Squibb diabetes 1,513
Tramadol............. Ultram Johnson & Johnson chronic pain 500
Citalopram........... Celexa Forest depression 652(2)
------------
(1) Includes brand and generics.
(2) Sales of Celexa in Canada for the year ended December 31, 2000 were
approximately U.S. $25 million.
BUPROPION
A four times daily immediate-release formulation of bupropion, introduced in
July 1989 by Glaxo is marketed in the United States under the brand name
Wellbutrin. In addition, a twice-daily controlled-release formulation of
bupropion, introduced in November 1996 by Glaxo, is marketed in the U.S. under
the brand name Zyban for use as an aid in smoking cessation and as Wellbutrin SR
for depression. U.S. sales of Wellbutrin SR/Zyban including generics were
approximately $874 million for the twelve months ended December 31, 2000. We are
currently at the scale-up stage of developing our product.
INDICATION: Bupropion is indicated for the symptomatic relief of depressive
illness. Major depression is frequently encountered by patients of primary care
physicians. Depression may occur in neurosis as well as in mood disorders and is
a manifestation of major psychiatric illness. Bupropion is also indicated in the
United States for use as an aid in smoking cessation.
CLINICAL EFFICACY: Bupropion has been proved to be effective in the
treatment of depression. An open, uncontrolled study of 3,167 patients at 105
sites showed that functional status improved in patients treated with Wellbutrin
SR for up to 56 days. This improvement was highly correlated with improvement in
clinical symptoms.
Bupropion can also be used in conjunction with other anti-depressant drugs.
When combined with another class of anti-depressants, specified neurotransmitter
modulators ("SNMs"), in 27 patients, greater symptomatic improvement was found
in 19 (70%) of those 27 subjects during a combined daily use of bupropion with
an SNM (Prozac-equivalent) than with either drug alone.
Our once-daily controlled-release formulation of bupropion seeks to
significantly improve upon the existing sustained release formulation by
providing sustained plasma levels with better control of symptoms and improved
compliance with convenient once-a-day dosing. Clinically, it is important that
symptoms in the depressed patient be adequately controlled as compliance is a
major concern in these patients.
In a study with children with attention deficit disorder with hyperactivity
("ADDH"), the results indicated that bupropion may also be a useful addition to
available treatments for ADDH.
In addition, bupropion has been demonstrated to be an effective aid in
smoking cessation. In a placebo-controlled trial comparing transdermal nicotine,
and sustained-release bupropion, and a combination of both transdermal nicotine
and sustained-release bupropion in 893 patients for nine weeks, smoking
cessation rates were 20% with placebo, 32% with nicotine alone, 46% with
bupropion alone and 51% with both transdermal nicotine and bupropion.
MARKET SIZE: Sales of anti-depressant products totaled $8.9 billion for the
twelve months ended December 31, 2000. Buproprion is classified as a new
generation anti-depressant. The anti-depressant market consists of four major
drug categories: new generation antidepressants, SSRIs/SNRIs (Selective
Seratonin
18
Reuptake Inhibitors/Selective Norepinephrine Reuptake Inhibitors), tricylic
antidepressants, and monoamine oxidase inhibitors. Major marketed brands include
Prozac (fluoxetine), Paxil (paroxetine), Zoloft (sertaline), Effexor XR
(venlafaxine) and Wellbutrin (bupropion). The smoking cessation market was
$809 million for the twelve months ended December 31, 2000. Major marketed
brands of smoking cessation products include nicotine products such as Nicoderm,
Habitrol, Nicorette, Nicotrol and Prostep.
BUSPIRONE
A three times daily immediate-release formulation of buspirone, introduced
in October 1986 by Bristol-Myers Squibb Company, is marketed in the United
States under the brand name Buspar. U.S. sales of Buspar were approximately
$674 million for the twelve months ended December 31, 2000. We are currently
engaged in Phase III clinical trials for our controlled-release formulation of
buspirone.
INDICATION: Buspirone is indicated for the short-term symptomatic relief of
excessive anxiety in patients with generalized anxiety disorder ("GAD"), which
is also known as anxiety neurosis. GAD is a neurotic disorder characterized by
chronic unrealistic anxiety often punctuated by acute attacks of anxiety or
panic. Anxiety is a symptom of almost all psychiatric disorders and is
encountered in day-to-day practice by both the general practitioner and the
psychiatrist.
CLINICAL EFFICACY: Controlled studies suggest that buspirone is effective
in treating GAD and that, unlike other anti-anxiety drugs, tolerance to the
therapeutic effect of buspirone does not develop. In one study involving 121
patients, buspirone was found to be effective in improving both anxiety and
depressive symptoms in GAD patients. Another study showed that buspirone was
more effective and had fewer side effects than lorazepam, a competing drug, and
that, unlike patients treated with lorazepam, those treated with buspirone did
not exhibit rebound anxiety. Given its effectiveness in treating symptoms of
depression associated with GAD, buspirone is also an effective and well
tolerated drug for the treatment of depressive disorders.
MARKET SIZE: The anti-anxiety market had approximately $1.6 billion in
U.S. sales for the twelve months ended December 31, 2000 of which buspirone was
the market leader. Due to its efficacy in treating depressive symptoms in GAD
patients, Buspirone also indirectly competes in the market for antidepressant
drugs, including the market for SSRIs and SNRIs, which represented U.S. sales of
approximately $7.4 billion for the twelve months ended December 31, 2000. Major
anti-anxiety brands other than Buspar include Xanax (alprazolam), Librium
(chlordiazepoxide), Valium (diazepam), Ativan (lorazepam), Serax (oxazepam) and
Atarax (hydroxyzine).
METFORMIN
A two to three times daily immediate-release formulation of metformin,
introduced in April 1995 by Bristol-Myers Squibb Company, is marketed in the
United States under the brand name Glucophage. Recently Bristol-Myers Squibb
introduced a controlled release metformin formulation marketed as Glucophage XR.
U.S. sales of Glucophage and Glucophage XR were approximately $1.5 billion for
the twelve months ended December 31, 2000. We are currently in the formulation
development stage of this product.
INDICATION: Metformin is indicated for the treatment of diabetes mellitus
which cannot be controlled by proper dietary management, exercise and weight
reduction or when insulin therapy is not appropriate. Diabetes is a common
disorder in which there are inappropriately elevated blood glucose levels and a
variety of end organ complications leading to impaired kidney function and
accelerated atherosclerosis.
CLINICAL EFFICACY: Clinical advantages of metformin include achieving
control of elevated blood sugar levels without exacerbating weight gain, which
is a common side effect of other anti-diabetic treatments. Metformin differs
from the sulfonylureas in that it does not elevate insulin secretion and does
not produce abnormally low blood sugar levels.
In controlled trials, metformin has shown efficacy in lowering elevated
blood sugar levels in the treatment of diabetes mellitus. In one such study of
289 obese patients with non-insulin dependent diabetes, poorly controlled with
diet, the patients were given metformin or a placebo. Blood sugar levels were on
average 29% lower in patients receiving metformin than in patients receiving a
placebo. Furthermore, total cholesterol, LDL,
19
and triglyceride concentrations decreased in patients receiving metformin, but
did not change in patients receiving a placebo.
MARKET SIZE: The oral anti-diabetic market represented approximately
$3.4 billion in U.S. sales for the twelve months ended December 31, 2000. Major
anti-diabetic products other than Glucophage include Glucotrol XL (glipizide),
Avandia (rosiglitazone) and Actos (pioglitazone).
TRAMADOL
A three to four times daily immediate-release formulation of tramadol,
introduced in March 1995 by Johnson and Johnson, is marketed in the United
States under the brand name Ultram. U.S. sales of Ultram were approximately
$500 million for the twelve months ended December 31, 2000. We are currently
engaged in Phase III trials for this product.
INDICATION: Tramadol is indicated for the treatment of a variety of pain
syndromes, including management of moderate to moderately severe chronic pain
associated with cancer and other terminal illnesses. Pain is a common symptom of
many diseases and is generally seen in everyday clinical practice.
CLINICAL EFFICACY: Tramadol is one of a number of narcotic (opioid)
analgesics, which are among the most effective and valuable medications for the
treatment of chronic pain. Tramadol's minimal propensity to induce typical
opioid adverse effects is an advantage over other morphine-like agents. For
example, relative to Morphine, tramadol causes less dependence and less
respiratory depression. Tramadol also appears to be a promising drug for
post-operative pain relief.
In an article published in the American Journal of Medicine, the author
concluded that, based on clinical experience, tramadol appears to have a low
potential for abuse or addiction. Results from U.S. and European studies
indicated that tramadol is an effective analgesic that may have a particularly
important role in the management of chronic pain. Tramadol has been prescribed
for almost two decades in Europe.
Two long-term safety studies conducted on patients with chronic,
nonmalignant pain demonstrated the efficacy of tramadol in a variety of pain
conditions.
Our once-daily controlled-release formulation of Tramadol seeks to provide
sustained pain control, as compared to the immediate- release form. This would
be especially useful to cancer or terminally ill patients who need analgesics as
a 24-hour treatment.
MARKET SIZE: The combined market for narcotic and non-narcotic analgesics
generated U.S. sales of $3.5 billion for the twelve months ended December 31,
2000.
CITALOPRAM
An immediate-release formulation of the anti-depressant citalopram was
launched in the United States in October 1998 and is marketed under the
trademark Celexa in the United States by Forest. U.S. sales of Celexa were
approximately $652 million for the twelve months ended December 31, 2000.
Lundbeck is currently conducting Phase III clinical trials on a
controlled-release version of Celexa developed by us.
INDICATION: Citalopram is indicated for the treatment of depression, which
is frequently encountered by patients of primary care physicians. Depression may
occur in neurosis as well as in mood disorders and is a manifestation of major
psychiatric illness.
CLINICAL EFFICACY: Citalopram has been proved to be effective in the
treatment of depression. Citalopram belongs to a class of drugs known as SSRIs.
Clinical studies have shown that compared to many other SSRIs, citalopram has an
improved side effect profile and a lower incidence of drug interactions when
taken concurrently with other medications.
MARKET SIZE: Sales for the drug treatment of depression in the United
States were $7.2 billion for the twelve months ended December 31, 2000.
Citalopram sales accounted for 3.3% of this market. Citalopram is marketed under
the names Cipramil and Seropram outside of the United States.
20
CARDIZEM-REGISTERED TRADEMARK- XL (DILTIAZEM)
Cardizem-Registered Trademark- branded products, introduced by Hoechst
Marion Roussel, a predecessor company of Aventis, have been a leading line in
the calcium channel blocker category for approximately twenty years. A
controlled-release, once daily version was introduced in August 1992 under the
brand name Cardizem-Registered Trademark- CD. We acquired the
Cardizem-Registered Trademark- family of products from Aventis in December 2000
and we are now developing Cardizem-Registered Trademark- XL as a superior
therapeutic version of Cardizem-Registered Trademark- CD.
INDICATION. Cardizem-Registered Trademark- XL has been approved for the
hypertension and angina indications.
CLINICAL EFFICACY. Long-term hypertension and angina studies have
demonstrated the efficacy and safety of diltiazem products. Cardizem XL is
designed to produce highest levels of diltiazem drug plasma concentrations and
thereby provide maximum protection during critical early morning hours when the
incidence of myocardial infarction (heart attack) and cerebro-vascular (stroke)
events is highest.
MARKET SIZE: Diltiazem-related once daily products accounted for
approximately $823 million of U.S. sales in the twelve months ended
December 31, 2000 out of total calcium channel blocker sales of $3.8 billion
during the same period. Cardizem-Registered Trademark- CD sales (including
generics) in the U.S. for the twelve months ended December 31, 2000 were
$544 million, equating to an estimated $833 million at brand pricing. As a
result of generic competition we expect U.S. sales of branded
Cardizem-Registered Trademark- CD to be in the range of $130-150 million
in 2001. We expect to launch Cardizem-Registered Trademark- XL in mid-2002. Due
to the high awareness of the Cardizem-Registered Trademark- brand name, we
anticipate significant conversion of patients from
Cardizem-Registered Trademark- CD to the new and improved branded product.
21
FLASHDOSE PRODUCTS
The acquisition of Fuisz in November 1999 gave us access to FlashDose drug
technology, including certain innovative drug delivery features such as Rapid
Dissolve, Enhanced Absorption and Taste Masking. We have been applying these
technologies in the development of FlashDose versions of several oral dosage,
controlled-release branded products. We believe that FlashDose technology
provides access to significant unmet market needs in such areas as pain relief,
migraine, pediatric and geriatric care. Additionally, FlashDose provides
superior product differentiation which can significantly enhance the
marketability of pharmaceutical products. Marketing strategies will be developed
on the basis of individual brand dynamics but provide us with the option of
partnering with the brand originator to achieve extended brand exclusivity and
defense against market share erosion by generics, or competing with the
originator upon patent expiry.
We are currently developing eight such products including Paroxetine,
Zolpidem and six as yet undisclosed products.
PAROXETINE FD
Paroxetine is marketed in the U.S. by GlaxoSmithKline under the brand name
Paxil. In 1999 SmithKline Beecham formulated a controlled release version of
paroxetine which to date has not been launched.
INDICATION: Paroxetine is indicated for the treatment of depression,
obsessive compulsive disorder (OCD), social anxiety disorder (SAD), and panic
disorder.
CLINICAL EFFICACY: Paroxetine was the first product approved for the
treatment of SAD and for the treatment of panic disorder. GlaxoSmithKline has
also filed for approval of paroxetine in treatment of post traumatic stress
disorder. Our product will enable patients to take orally disintegrating
paroxetine FlashDose anytime/anywhere without the use of water.
MARKET SIZE: Due to its efficacy in treating depressive symptoms, paroxetine
competes with other SSRI/ SNRIs (such as venlafaxine, fluoxetine and setraline)
and newer generation anti-depressants (such as bupropion and mirtazapine), MAOs,
tricyclics and tetracyclics. The total anti-depressant market in the U.S. was
estimated to be in excess of $8.9 billion in the twelve-month period ended
December 31, 2000. U.S sales of Paxil were in excess of $1.6 billion for the
twelve-month period ended December 31, 2000. We expect to file our product with
the FDA by approximately year-end 2001.
ZOLPIDEM FD
Zolpidem was launched in 1993 and is now marketed in the U.S. by
Searle/Pharmacia under the brand name Ambien.
INDICATION: Zolpidem is indicated for the short-term treatment of insomnia.
CLINICAL EFFICACY: Until the early 1990s pharmacological intervention for
insomnia usually resorted to short-term treatment with benzodiazepines. These
drugs were less than ideal due to their propensity to induce tolerance and
subsequent rebound insomnia at higher dosages, coupled with a long half-life
leading to lingering effects on next-day motor functioning. Zolpidem can
substantially reduce these adverse effects. Our product is designed to provide a
more rapid onset of action as compared with the existing Zolpidem formulation
and will employ FlashDose technology for greater patient convenience.
MARKET SIZE: The sleep disorder market in the U.S was in excess of
$832 million in the twelve-month period ended December 31, 2000. Pharmacia
Corporation's Ambien was the market leader with sales of $694 million during the
same period. We expect to file our product with the FDA by approximately
year-end 2001.
MARKETING
Prior to the acquisition of DJ Pharma in October 2000, we did not engage in
direct marketing or sales of our products outside of Canada. Instead, our
approach to marketing had been to enter into strategic licensing agreements with
various regional and multinational pharmaceutical companies for the marketing
and sale of our products in specified territories. While the specific terms of
each license agreement vary, the agreements in
22
general require the licensee to (1) purchase the product from us, (2) pay us a
royalty fee based on a specific percentage of net sales and/or a share of the
net profits from sales of the licensed products and (3) in certain circumstances
pay a license fee for access to our technologies.
FOREST LABORATORIES
We licensed the right to market Tiazac-Registered Trademark- in the United
States to Forest in September 1995 and the formal product launch took place in
February 1996. The license agreement with Forest provides for a royalty payment
of 8% of its net sales of Tiazac-Registered Trademark- for a period of
16 years, commencing December 1995. In addition, under a 16-year supply
agreement which also commenced December 1995, we act as the exclusive
manufacturer of Tiazac-Registered Trademark- for Forest and receive
contractually determined manufacturing fees.
TEVA PHARMACEUTICAL
In December 1997, we entered into an agreement with Teva for the development
and marketing in the United States of certain generic oral controlled-release
products. See "-- Generic Product Pipeline." Of these products, generic versions
of Trental, Cardizem-Registered Trademark- CD, Voltaren XR, Adalat CC and
Procardia XL have been approved by the FDA and we have filed ANDAs for Verelan,
Dilacor XR and Tegratol and 90 mg strengths of Adalat CC and Procardia XL. We
will manufacture the products covered by this agreement and will share the
profits, after deducting manufacturing costs and an allowance for selling and
distribution expenses incurred by Teva.
BIOVAIL PHARMACEUTICALS INC.
In October 2000, we began executing our strategy of establishing a high
calibre U.S branded pharmaceutical sales and marketing operation. We purchased
100% of DJ Pharma, a U.S. pharmaceutical sales and marketing company with
approximately 300 sales representatives and several drug brands. DJ Pharma
marketed and sold branded products to physicians for the treatment of
respiratory and allergy conditions and skin and soft tissue infections. DJ
Pharma's strategy has been to obtain marketing rights to products that have been
under-promoted by originator companies such as Eli Lilly and Co.,
Schering-Plough and Abbott Laboratories, increase the promotional activity and
thereby increase revenues for the product. We are establishing an expanded
sales/ marketing structure there in anticipation of growth in the sales force
from 300 to 800 representatives by mid 2002 to promote additional in-licensed
products and products from our development pipeline (most notably
Cardizem-Registered Trademark- XL).
CRYSTAAL
Crystaal, our Canadian marketing and sales division, performs sales and
marketing activities for our products as well as for products licensed from
third parties worldwide. Crystaal is located at our headquarters in Mississauga,
Ontario, Canada. Crystaal is dedicated to providing high quality, cost effective
branded pharmaceuticals to Canadian health care professionals and their
patients.
Crystaal has adopted a business strategy of acquiring licenses of third
parties to sell branded drug products through strategic joint ventures and
partnerships. We believe that this strategy, combined with our portfolio of
existing and new controlled-release branded products, places Crystaal in an
excellent position to become a significant marketing presence in the Canadian
market. Crystaal is the largest independent supplier of branded pharmaceutical
products in Canada. Its competitors are other independent suppliers and
divisions of large multinational pharmaceutical companies.
Crystaal's product portfolio strategy is to focus on drugs for the primary
care market, therapies for the acute care market and drugs for the treatment of
central nervous system and neurological disorders. All three therapeutic areas
represent rapidly growing market segments, offering a multitude of opportunities
for acquiring third party licenses.
23
The following table reflects products currently in Crystaal's portfolio and
pipeline and the status of their respective new drug submission ("NDS") filings
in Canada:
PRODUCT INDICATION STATUS
------- ------------------------------ ----------------------
Tiazac-Registered Trademark- hypertension, angina Approved and marketed
(diltiazem)............................
Celexa (citalopram)...................... depression Approved and marketed
Retavase-TM- (reteplase recombinant)..... acute myocardial infarction Approved and marketed
Brexidol (piroxicam--cyclodextrin)....... acute pain Approved and marketed
Cardiac STATus-TM-....................... diagnosis of myocardial Approved and marketed
infarction
Monocor (bisoprolol fumarate)............ hypertension Approved and marketed
Attenade (d-methylphenidate)............. Attention In development
Deficit-Hyperactivity Disorder
(ADHD)
Fibrostat-TM-............................ treatment of scars following In development
surgery and burns
Ampligen-Registered Trademark-........... Chronic Fatigue Syndrome (CFS) In development
In Canada, Crystaal markets Tiazac-Registered Trademark- through its field
force consisting of over 75 representatives. Tiazac-Registered Trademark- has
been accepted on the provincial drug formularies in each of the provinces of
Canada, thereby making it eligible for reimbursement by the provincial
government health plan in all provinces.
Crystaal co-promotes the immediate-release version of Celexa in
collaboration with Lundbeck Canada Inc. Crystaal promotes Celexa to primary care
physicians and will receive co-promotion fees for contributing to the marketing
of Celexa in Canada.
INTERNATIONAL MARKETING ALLIANCES
Tiazac-Registered Trademark- is marketed under the trade name Viazem XL and
under other trademarks in Europe. It is licensed to Stada in the United Kingdom
and Ireland; Stada, Ratiopharm GmbH and Heumann GmbH in Germany; Zambon B.V. in
The Netherlands; A/S GEA Farmaceutisk Fabrik in Denmark, Sweden and Finland and
Crinos S.p.A. in Italy. We have also licensed the product to two companies in
South America and a company in Australia.
TECHNOLOGY
We have six proprietary drug delivery technologies that we use to develop
controlled-release and rapid dissolve products. These technologies enable us to
develop both branded and generic pharmaceutical products. Our formulations for
these products are either patented or proprietary. Accordingly, other generic
manufacturers may be inhibited from duplicating products because of our patented
or proprietary rights or because of the difficulty of duplicating our
formulations.
Oral controlled-release technology permits the development of specialized
oral drug delivery systems that improve the absorption and utilization by the
human body of a variety of pharmaceutical compounds. Release patterns are
characterized as zero order, which indicates constant release over time, or
first order, which indicates decreasing release over time. These systems offer a
number of advantages, in particular, allowing the patient to take only one or
two doses a day. This, combined with enhanced therapeutic effectiveness, reduced
side effects, improved compliance and potential cost effectiveness, makes
controlled-release drugs ideally suited for the treatment of chronic conditions.
Our controlled-release technologies can provide a broad range of release
profiles, taking into account the physical and chemical characteristics of a
drug product, the therapeutic use of the particular drug and the optimal site
for release of the basic drug in the gastrointestinal tract (the "GI tract").
The objective is to provide a delivery system allowing for a single dose per 12
to 24 hour period, while assuring gradual and controlled-release of the subject
drug at a suitable location(s) in the GI tract.
24
Our rapid dissolve formulations contain the same basic chemical compound
found in the original branded products. The dry compounds are encapsulated in
microspheres utilizing our CEFORM-Registered Trademark- technology. Our
Shearform-Registered Trademark- technology is used to produce matrices that are
subsequently processed into amorphous fibers which, when blended with the
CEFORM-Registered Trademark- microspheres, are compressed into rapid dissolve
formulations including FlashDose tablets. The benefits of rapid dissolve
formulations include the ease of administration for the elderly, young children
or people with disease states who may have difficulty swallowing tablets or
capsules.
We use six proprietary drug delivery platforms, described below, involving
matrix tablets or multiparticulate beads in capsules. These platforms are
capable of delivering a wide variety of drug compounds in controlled-release and
rapid dissolve oral dosage formulations.
DIMATRIX
Dimatrix is a diffusion controlled matrix technology for water soluble drugs
in the form of tablets. The drug compound is uniformly dispersed in a polymer
matrix. The mechanism of release involves the swelling of polymers within the
matrix, thus enabling the drug to be dissolved and released by diffusion through
an unstirred boundary layer. The release pattern is characterized as first order
as the rate of drug diffusion out of the swollen matrix is dependent upon the
concentration gradient.
MACROCAP
Macrocap consists of immediate-release beads made by
extrusion/spheronization/pelletization techniques or by layering powders or
solutions on nonpareil seeds. Release modulating polymers are sprayed on the
beads using various coating techniques. The coated beads are filled in hard
gelatin capsules. Drug release occurs by diffusion associated with bioerosion or
by osmosis via the surface membrane. The release mechanism can be pH activated
or pH independent. The beads can be formulated to produce first order or zero
order release.
CONSURF
Consurf is a zero order drug delivery system for hydrophilic and hydrophobic
drugs in the form of matrix tablets. The drug compound is uniformly dispersed in
a matrix consisting of a unique blend of polymers. The mechanism of release
involves the concurrent swelling and erosion of the matrix such that a constant
surface matrix area is maintained during transit through the GI tract, resulting
in zero order release.
MULTIPART
Multipart consists of a tablet carrier for the delivery of
controlled-release beads which preserves the integrity and release properties of
the beads. The distribution of the beads is triggered by disintegration of the
tablet carrier in the stomach. Drug release from the beads can be pH activated
or pH independent and can occur by disintegration or osmosis. The beads can be
formulated to produce first or zero order release.
CEFORM-REGISTERED TRADEMARK-
CEFORM-Registered Trademark- is a microsphere technology used to produce
uniformly sized and shaped microspheres of a wide range of pharmaceutical
compounds. The microspheres are nearly perfectly spherical in shape, typically
have a diameter of 150 - 180 microns, and allow for high drug content.
CEFORM-Registered Trademark- microspheres are produced using a continuous,
single-step and solvent-free manufacturing process that can be used to formulate
drugs that are generally thermally unstable because of the very brief
application of heat and the wide range of temperatures which can be used in the
manufacturing process. Depending on the desired release characteristics and oral
dosage format, CEFORM-Registered Trademark- microspheres can be formulated for
controlled-release, enhanced absorption, and taste masking.
SHEARFORM-REGISTERED TRADEMARK-
Shearform-Registered Trademark- is used to produce matrices of saccharides,
polysaccharides, or other carrier materials that are subsequently processed into
amorphous fibers or flakes and recrystallized to a predetermined level. This
process
25
is used to produce rapid dissolve formulations, including FlashDose.
Shearform-Registered Trademark- can also be applied to food product ingredients
to provide enhanced flavoring.
RESEARCH AND DEVELOPMENT
Our staff of scientists has expertise in all aspects of the drug development
process, from pre-formulation studies and formulation development to scale-up
and manufacturing. We have successfully developed appropriate delivery systems
for pharmaceutical compounds exhibiting a wide range of solubility and
hydrophobicity characteristics.
Subsequent to the acquisition in November 1999 of Fuisz, we concluded that
it was appropriate to integrate much of the Research and Development being
conducted at our Mississauga, Ontario, Canada facility with that being conducted
at the Fuisz, Chantilly Virginia, facility. This integration was carried out
during 2000 such that only formulation development work is now carried out in
Mississauga. The Chantilly facility comprises 91,000 square feet of
administrative, laboratory and manufacturing space. In addition we maintain a
5,700 square foot facility in Dublin, Ireland.
MANUFACTURING FACILITIES
We currently operate two modern, fully-integrated pharmaceutical
manufacturing facilities located in Steinbach, Manitoba, Canada and Carolina,
Puerto Rico, respectively. Both facilities meet FDA-mandated good manufacturing
practices and are inspected on a regular basis by U.S., Canadian and other
regulatory bodies and our own auditing team to ensure compliance on an ongoing
basis with such standards.
Our 75,000 square foot plant in Steinbach, Manitoba was constructed in 1994.
Its manufacturing processes include (1) granulation and coating with solvents,
bead extrusion and spheronization; (2) fluid bed drying and tableting; (3) high
speed encapsulation with 100% quality control weight checks; and (4) high speed
automatic packaging lines.
The Carolina, Puerto Rico facilities total 34,000 square feet, including
23,000 square feet of manufacturing capacity and 11,000 square feet of
additional leased warehouse space. This plant is specially constructed for the
high volume production of controlled-release beads.
In January 2001 we acquired for $11.0 million a 120,000 square foot, fully
FDA approved, manufacturing facility on 19 acres of land in Dorado, Puerto Rico.
This modern facility was previously used for pharmaceutical manufacture by
McNeil Pharmaceuticals, a division of Johnson & Johnson, Inc. We will be
investing further in this facility to enable us to phase out production of
Tiazac-Registered Trademark- beads and generic products at our Carolina facility
over the next eighteen months. We believe that the additional capacity afforded
by this new facility will meet the manufacturing needs for our current products
and the new branded generic and FlashDose products for at least the coming three
years.
For additional discussion regarding our manufacturing facilities see
Item 4.D. "Property, Plant and Equipment".
CONTRACT RESEARCH DIVISION
Our CRD provides us and other pharmaceutical companies with a broad range of
clinical research services, including pharmacokinetic studies and bioanalytical
laboratory testing. The CRD can also provide support services to its clients in
the area of quality assurance.
Operating as an independent business unit with its own independent internal
ethics review board, the CRD is located in a 33,000 square foot stand-alone
facility owned by us and an 11,000 square foot facility leased by us, in each
case located in Toronto, Ontario. These facilities include a fully equipped
bioanalytical laboratory, a department of biopharmaceutics and statistical
analysis and a live-in 216-bed study clinic.
To date, the CRD has designed and conducted in excess of 1,700 Phase I
bioavailability, bioequivalence and drug interaction studies involving in excess
of 180 pharmaceutical products. Therapeutic areas in which studies have been
completed include cardiovascular, cardiopulmonary, bone and joint disease, pain
management, infectious diseases, central nervous system, gastroenterology and
endocrinology. In addition, the CRD is active
26
and experienced in the design and implementation of Phase III and Phase IV
clinical trials from protocol design and monitoring to completion of statistical
reports.
The CRD includes a full-service bioanalytical laboratory that performs
specialized bioanalytical and quality control testing and method development as
well as other laboratory services for major regional and multinational
pharmaceutical concerns. The laboratory is subject to full compliance with
applicable regulations and standards required by United States, Canadian and
certain other foreign regulatory bodies.
REGULATORY AFFAIRS AND QUALITY ASSURANCE
Our Corporate Regulatory Affairs Department performs a key role in every
aspect of the development and registration of each product and has prepared
product submissions for regulatory agencies in the United States, Canada, the
United Kingdom and the European Union. This department also coordinates all data
and document management, including amendments, supplements and adverse events
reporting. Our Quality Assurance Department seeks to ensure that all stages of
product development and production fully comply with Good Clinical, Laboratory
and Manufacturing Practices.
PATENTS AND PROPRIETARY RIGHTS
We have not routinely sought patents on our controlled-release technology
because (1) a significant number of our current products under development are
generic drugs and, when another company files an ANDA which competes with any
ANDA filed for one of our generic products, patent protection would not afford
benefits (which normally accrue to NDA holders) and (2) the filing of certain
patents may provide potential competitors with information relating to
proprietary technology which may enable such competitors to exploit information
related to such technology which is not within the confines of the protection of
the patent. Historically, we have relied on trade secrets, know-how and other
proprietary information. While certain of our licensors have sought patents on
controlled-release technology licensed to it, there can be no assurance that any
patents will be issued or, if issued, that the manufacture, use, sale,
importation or offer for sale of such patented matter will not infringe upon
other patents or technology. Our ability to compete effectively with other
companies will depend, in part, upon our ability to maintain the proprietary
nature of our technology and to avoid infringing patents of others. To protect
our rights in these areas, we require all licensors, licensees and significant
employees to enter into confidentiality agreements. There can be no assurance,
however, that these agreements will provide meaningful protection for our trade
secrets, know-how or other proprietary information in the event of any
unauthorized use or disclosure of such trade secrets, know-how or other
proprietary information.
COMPETITION
The pharmaceutical industry is highly competitive and subject to rapid and
significant technological change. Our products face competition from both
conventional forms of drug delivery and controlled-release drug delivery systems
developed, or under development, by other pharmaceutical concerns. Many of these
competitors have greater financial resources and marketing capabilities than we
have. Our competitors in the United States and abroad are numerous and include,
among others, major pharmaceutical and chemical companies, including, without
limitation, some of the licensees (or potential licensees) of our products,
specialized contract research and research and development firms, universities
and other research institutions. We believe that our controlled-release
technology combined with our strategy of funding and controlling all or most
aspects of our controlled-release pharmaceutical business will provide the cost
savings, efficiencies in product development and acceleration of regulatory
filings necessary for it to compete effectively with such firms and
institutions. Our competitors, however, may succeed in developing technologies
and products that are as, or more, clinically or cost-effective than any that
are being developed or licensed by us or that would render our technologies and
products obsolete or uncompetitive. In addition, certain of our competitors have
greater experience than us in clinical testing and human clinical trials of
pharmaceutical products and in obtaining FDA and other regulatory approvals.
27
REGULATION
The research and development, manufacture and marketing of
controlled-release pharmaceuticals are subject to regulation by U.S., Canadian
and foreign governmental authorities and agencies. Such national agencies and
other federal, state, provincial and local entities regulate the testing,
manufacturing, safety and promotion of our products. The regulations applicable
to our products may change as the currently limited number of approved
controlled-release products increases and regulators acquire additional
experience in this area.
UNITED STATES REGULATION
NEW DRUG APPLICATION
We will be required by the FDA to comply with NDA procedures for our branded
products prior to commencement of marketing by us or our licensees. New drug
compounds and new formulations for existing drug compounds which cannot be filed
as ANDAs are subject to NDA procedures. These procedures include
(1) preclinical laboratory and animal toxicology tests; (2) scaling and testing
of production batches; (3) submission of an Investigational New Drug Application
("IND"), which must become effective before human clinical trials commence;
(4) adequate and well controlled human clinical trials to establish the safety
and efficacy of the drug for its intended indication; (5) the submission of an
NDA to the FDA; and (6) FDA approval of an NDA prior to any commercial sale or
shipment of the product, including pre-approval and post-approval inspections of
its manufacturing and testing facilities. If all of this data in the product
application is owned by the applicant, the FDA will issue its approval without
regard to patent rights that might be infringed or exclusivity periods that
would affect the FDA's ability to grant an approval if the application relied
upon data which the applicant did not own. We intend to generate all data
necessary to support FDA approval of the applications we file.
Preclinical laboratory and animal toxicology tests must be performed to
assess the safety and potential efficacy of the product. The results of these
preclinical tests, together with information regarding the methods of
manufacture of the products and quality control testing, are then submitted to
the FDA as part of an IND requesting authorization to initiate human clinical
trials. Once the IND notice period has expired, clinical trials may be
initiated, unless a hold on clinical trials has been issued by the FDA.
Clinical trials involve the administration of a pharmaceutical product to
individuals under the supervision of qualified medical investigators. Clinical
studies are conducted in accordance with protocols that detail the objectives of
a study, the parameters to be used to monitor safety and the efficacy criteria
to be evaluated. Each protocol is submitted to the FDA and to an Institutional
Review Board prior to the commencement of each clinical trial. Clinical studies
are typically conducted in three sequential phases, which may overlap. In Phase
I, the initial introduction of the product into human subjects, the compound is
tested for safety, dosage, tolerance, metabolic interaction, distribution,
excretion and pharmacodynamics. Phase II involves studies in a limited patient
population to (1) determine the efficacy of the product for specific targeted
indications, (2) determine optimal dosage and (3) identify possible adverse
effects and safety risks. In the event Phase II evaluations demonstrate that a
pharmaceutical product is effective and has an acceptable safety profile, Phase
III clinical trials are undertaken to further evaluate clinical efficacy of the
product and to further test its safety within an expanded patient population at
geographically dispersed clinical study sites. Periodic reports on the clinical
investigations are required. We or the FDA may suspend clinical trials at any
time if either party believes the clinical subjects are being exposed to
unacceptable health risks. The results of the product development, analytical
laboratory studies and clinical studies are submitted to the FDA as part of an
NDA for approval of the marketing and commercialization of a pharmaceutical
product.
The above-described NDA procedures are premised on the applicant being the
owner of, or having obtained a right of reference to, all of the data required
to prove safety and efficacy. These NDAs are governed by 21 U.S.C.
Section 355(b)(1), also known as Section 505(b)(1) of the FDC Act.
28
ABBREVIATED NEW DRUG APPLICATION
In certain cases, where the objective is to develop a generic version of an
approved product already on the market in controlled-release dosages, an ANDA
may be filed in lieu of filing an NDA. Under the ANDA procedure, the FDA waives
the requirement to submit complete reports of preclinical and clinical studies
of safety and efficacy and instead requires the submission of bioequivalency
data, that is, demonstration that the generic drug produces the same effect in
the body as its brand-name counterpart and has the same pharmacokinetic profile,
or change in blood concentration over time. The ANDA procedure would be
available to us for a generic version of a drug product approved by the FDA. In
certain cases, an ANDA applicant may submit a suitability petition to the FDA
requesting permission to submit an ANDA for a drug product that differs from a
previously approved reference drug product (the "Listed Drug") when the change
is one authorized by statute. Permitted variations from the Listed Drug include
changes in: (1) route of administration, (2) dosage form, (3) strength and
(4) one of the active ingredients of the Listed Drug when the Listed Drug is a
combination product. The FDA must approve the petition before the ANDA may be
submitted. An applicant is not permitted to petition for any other kinds of
changes from listed drugs. The information in a suitability petition must
demonstrate that the change from the Listed Drug requested for the proposed drug
product may be adequately evaluated for approval without data from
investigations to show the proposed drug product's safety or effectiveness. The
advantages of an ANDA over an NDA include reduced research and development costs
associated with bringing a product to market, and generally a shorter review and
approval time at the FDA.
PATENT CERTIFICATION AND EXCLUSIVITY ISSUES
ANDAs are required to include certifications with respect to any patents
which claim the Listed Drug or which claim a use for the Listed Drug for which
the applicant is seeking approval. If applicable patents are in effect and this
information has been submitted to the FDA, the FDA must delay approval of the
ANDA until the patents expire. If the applicant believes it will not infringe
the patents, it can make a patent certification to the holder of patents on the
drug for which a generic drug approval is being sought, which may result in
patent infringement litigation which could delay the FDA approval of the ANDA
for up to 30 months. If the drug product covered by an ANDA were to be found by
a court to infringe another company's patents, approval of the ANDA could be
delayed until the patents expire. Under the FDC Act, the first filer of an ANDA
with a "non-infringement" certification is entitled to receive 180 days of
market exclusivity. Subsequent filers of generic products would be entitled to
market their approved product six months after the earlier of the first
commercial marketing of the first filer's generic product or a successful
defense of a patent infringement suit.
Patent expiration refers to expiry of U.S. patents (inclusive of any
extensions) on drug compounds, formulations and uses. Patents outside the United
States may differ from those in the United States. Under U.S. law, the
expiration of a patent on a drug compound does not create a right to make, use
or sell that compound. There may be additional patents relating to a person's
proposed manufacture, use or sale of a product that could potentially prohibit
such person's proposed commercialization of a drug compound.
The FDC Act contains non-patent market exclusivity provisions which offer
additional protection to pioneer drug products and are independent of any patent
coverage that might also apply. Exclusivity refers to the fact that the
effective date of approval of a potential competitor's ANDA to copy the pioneer
drug may be delayed or, in certain cases, an ANDA may not be submitted until the
exclusivity period expires. Five years of exclusivity are granted to the first
approval of a "new chemical entity." Three years of exclusivity may apply to
products which are not new chemical entities, but for which new clinical
investigations are essential to the approval. For example, a new indication for
use or a new dosage strength of a previously-approved product may be entitled to
exclusivity, but only with respect to that indication or dosage strength.
Exclusivity only offers protection against a competitor entering the market via
the ANDA route, and does not operate against a competitor that generates all of
its own data and submits a full NDA under Section 505(b)(1) of the FDC Act.
If applicable regulatory criteria are not satisfied, the FDA may deny
approval of an NDA or an ANDA or may require additional testing. Product
approvals may be withdrawn if compliance with regulatory standards is not
maintained or if problems occur after the product reaches the market. The FDA
may require further testing and surveillance programs to monitor the
pharmaceutical product that has been commercialized.
29
Noncompliance with applicable requirements can result in additional penalties,
including product seizures, injunction actions and criminal prosecutions.
CANADIAN REGULATION
The requirements for selling pharmaceutical drugs in Canada are
substantially similar to those of the United States described above.
INVESTIGATIONAL NEW DRUG APPLICATION
Before conducting clinical trials of a new drug in Canada, we must submit a
pre-clinical submission to the TPP. This application includes information about
the methods of manufacture of the drug and controls, and preclinical laboratory
and animal toxicology tests on the safety and potential efficacy of the drug.
If, within 60 days of receiving the application, the TPP does not notify us that
our application is unsatisfactory, we may proceed with clinical trials of the
drug. The phases of clinical trials are the same as those described above under
"United States Regulation -- New Drug Application."
NEW DRUG SUBMISSION
Before selling a new drug in Canada, we must submit an NDS to the TPP and
receive a notice of compliance from the TPP to sell the drug. The NDS includes
information describing the new drug, including its proper name, the proposed
name under which the new drug will be sold, a quantitative list of ingredients
in the new drug, the methods of manufacturing, processing, and packaging the new
drug, the controls applicable to these operations, the tests conducted to
establish the safety of the new drug, the tests to be applied to control the
potency, purity, stability and safety of the new drug, the results of clinical
trials, the intended indications for which the new drug may be prescribed and
the effectiveness of the new drug when used as intended. The TPP reviews the
NDS. If the NDS meets the requirements of Canada's Food and Drugs Act and
Regulations, the TPP will issue a notice of compliance ("NOC") for the new drug.
Where the TPP has already approved a drug for sale in controlled-release
dosages, we may seek approval from the TPP to sell an equivalent generic drug.
In certain cases, the TPP does not require the manufacturer of a drug that is
equivalent to a drug that has already been approved for sale by the TPP to
conduct preclinical tests and clinical trials; instead, the manufacturer must
satisfy the TPP that the drug is bioequivalent to the drug that has already been
approved.
The TPP may deny approval or may require additional testing of an NDS if
applicable regulatory criteria are not met. Product approvals may be withdrawn
if compliance with regulatory standards is not maintained or if problems occur
after the product reaches the market. Contravention of Canada's Food and Drugs
Act and Regulations can result in fines and other sanctions, including product
seizures and criminal prosecutions.
Proposals have recently been made that, if implemented, would significantly
change Canada's drug approval system. In general, the recommendations emphasize
the need for efficiency in Canadian drug review. Proposals include establishment
of a separate agency for drug regulation and modeling the approval system on
those found in European Union countries. There is no assurance, however, that
such changes will be implemented or, if implemented, will expedite the approval
of controlled-release products.
The Canadian government has regulations which can prohibit the issuance of
an NOC for a patented medicine to a generic competitor, provided that the
patentee or an exclusive licensee has filed a list of its Canadian patents
covering that medicine with the Minister of Health and Welfare. After submitting
the list, the patentee or an exclusive licensee can commence a proceeding to
obtain an order of prohibition directed to the Minister prohibiting him or her
from issuing an NOC. The minister may be prohibited from issuing an NOC
permitting the importation or sale of a patented medicine to a generic
competitor until patents on the medicine expire or the waiver of infringement
and/or validity of the patent(s) in question is resolved by litigation in the
manner set out in such regulations. There may be additional patents relating to
a company's proposed manufacture, use or sale of a product that could
potentially prohibit such company's proposed commercialization of a drug
compound.
30
Certain provincial regulatory authorities in Canada have the ability to
determine whether the consumers of a drug sold within such province will be
reimbursed by a provincial government health plan for that drug by listing drugs
on formularies. The listing or non-listing of a drug on provincial formularies
may affect the prices of drugs sold within provinces and the volume of drugs
sold within provinces.
ADDITIONAL REGULATORY CONSIDERATIONS
Sales of our products by our licensees outside the United States and Canada
are subject to regulatory requirements governing the testing, registration and
marketing of pharmaceuticals, which vary widely from country to country.
Our manufacturing facilities located at Steinbach, Manitoba and Carolina,
Puerto Rico operate according to FDA mandated Good Manufacturing Practices. The
manufacturing facilities are inspected on a regular basis by the FDA, the TPP
and other regulatory authorities. Our self-auditing team seeks to ensure
compliance on an ongoing basis with FDA mandated Good Manufacturing Practices.
From time to time, the FDA, the TPP or other regulatory agencies may adopt
regulations that may significantly affect the manufacture and marketing of our
products.
In addition to the regulatory approval process, pharmaceutical companies are
subject to regulations under provincial, state and federal law, including
requirements regarding occupational safety, laboratory practices, environmental
protection and hazardous substance control, and may be subject to other present
and future local, provincial, state, federal and foreign regulations, including
possible future regulations of the pharmaceutical industry. We believe that we
are in compliance in all material respects with such regulations as are
currently in effect.
C. ORGANIZATIONAL STRUCTURE
The subsidiaries of the Company are detailed under "Subsidiary Information"
in Item 10.I.
D. PROPERTY, PLANT AND EQUIPMENT
We own and lease space for manufacturing, warehousing, research,
development, sales, marketing, and administrative purposes. The acquisition of
the Dorado, Puerto Rico manufacturing facility was completed in January 2001,
and we are currently completing plans to upgrade this facility to meet our
manufacturing requirements and to transition production from the Carolina
facility. We have recently acquired seven acres of land in Mississauga, Ontario
where we will be constructing a new office facility for the corporate office and
the Crystaal business unit.
31
The following table lists the location, use, size and ownership interest of
Biovail's principal properties:
LOCATION USE SIZE OWNERSHIP
-------- ------------------------------------------- --------------- ---------
Mississauga, Ontario, Corporate administration, product 35,000 Sq. Ft. Leased
Canada.................... development, sales and administration
Toronto, Ontario, Canada.... Research and development 33,000 Sq. Ft. Owned
11,000 Sq. Ft. Leased
Steinbach, Manitoba, Manufacturing 75,000 Sq. Ft. Owned
Canada....................
Chantilly, VA, USA.......... Research, development, and manufacturing 91,000 Sq. Ft. Leased
Sterling, VA, USA........... Manufacturing 17,000 Sq. Ft. Leased
Morrisville, NC, USA........ Sales and administration 36,000 Sq. Ft. Leased
Carolina, Puerto Rico....... Manufacturing 34,000 Sq. Ft. Owned
Dorado, Puerto Rico......... Manufacturing 120,000 Sq. Ft. Owned
St. Michael, Barbados....... Licensing and administration 11,000 Sq. Ft. Leased
Dublin, Ireland............. Research and development 5,700 Sq. Ft. Leased
For additional discussion regarding our property, plant, and equipment see
Item 4.B "Manufacturing and Facilities".
32
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INDEX
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") prepared in accordance with Canadian GAAP
should be read in conjunction with the audited consolidated financial statements
and related notes thereto prepared in accordance with Canadian GAAP included
under Item 18 "Financial Statements". Likewise, the following MD&A prepared in
accordance with U.S. GAAP should be read in conjunction with the audited
consolidated financial statements and related notes thereto prepared in
accordance with U.S. GAAP also included under Item 18.
Pursuant to shareholder consent, our common shares twice split on a 2 for 1
basis during 2000, first in January and again in October. All share and per
share amounts in the MD&As, and in the audited consolidated financial
statements, prepared in accordance with Canadian and U.S. GAAP have been
retroactively adjusted to give effect to the stock splits.
PAGE
--------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In accordance with Canadian generally accepted accounting
principles.............................................. 34
In accordance with U.S. generally accepted accounting
principles.............................................. 48
33
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN U.S. DOLLARS)
OVERVIEW
During 2000, through strategic business acquisitions and internal growth, we
made significant progress towards becoming a fully integrated pharmaceutical
company, while maintaining our focus on the development of drugs utilizing our
advanced controlled-release, rapid dissolve, enhanced absorption and taste
masking technologies. Our successes during the year include the completion of a
securities offering that raised gross proceeds of approximately $400 million,
and provided the necessary capital to pursue our growth strategy. Our
acquisition of DJ Pharma, Inc. ["DJ PHARMA"], gives us a base of product
revenues, and an experienced pharmaceuticals sales force and infrastructure in
the United States to complement our Crystaal sales and marketing operation in
Canada. Our combined North American sales force will be engaged in the
marketing, promotion and distribution of our existing proprietary and
in-licensed products, as well as DJ Pharma's product portfolio and the
Cardizem-Registered Trademark- product line that we purchased from Aventis
Pharmaceuticals Inc. ["AVENTIS"]. In the future, we intend to direct market the
branded products that are currently in our development pipeline, the potential
of which we are now able to fully exploit following our acquisition of
Intelligent Polymers Limited ["INTELLIGENT POLYMERS"].
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.
CHANGES IN ACCOUNTING POLICIES
The following MD&A and the audited consolidated financial statements reflect
our adoption of the following accounting policies during the period :
REVENUE RECOGNITION
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, 1998. These policies are
generally accepted under both U.S. and Canadian GAAP. 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 revenues 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, 1998, the cumulative effect of the change in accounting policy on
prior years resulted in a charge to retained earnings of $18.1 million. The
effect on the results for 2000 was to increase revenue and net income
attributable to common shareholders by $9.3 million. Restated results for
1999 and 1998 reflect a reduction in total revenue and net income attributable
to common shareholders of $11.4 million and $14 million, respectively. Restated
diluted earnings per share for 1999 and 1998 were $0.47 and $0.29, respectively
compared to $0.58 and $0.42, respectively as originally reported. As discussed
below, we have changed the methodology under which we calculate diluted earnings
per share. At December 31, 2000, we have recorded deferred revenue of
$34.2 million related to SAB 101.
34
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN U.S. DOLLARS)
INCOME TAXES
Effective January 1, 2000, we have adopted the new recommendations of The
Canadian Institute of Chartered Accountants ["CICA"] with respect to accounting
for income taxes. Under the new recommendations, the liability method of tax
allocation is used. Future tax assets and liabilities are recognized for the
differences between the financial statement and income tax bases of assets and
liabilities, and for operating losses and tax credit carryforwards. Previously,
we applied the deferral method based on differences in the timing of reporting
income and expenses in the financial statements and tax returns. We applied the
new recommendations retroactively without restatement of the financial
statements of prior years. At January 1, 2000, the cumulative effect of this
change in accounting policy on prior years resulted in a charge of
$51.8 million to retained earnings, a decrease in goodwill of $32.9 million and
a net increase in future income tax liability of $18.9 million. The adjustment
was primarily the result of our 1999 acquisition of Fuisz Technologies Ltd.
["FUISZ"] and the recognition of the tax consequences of the differences between
the assigned values and tax bases of the acquired assets and liabilities and the
recognition of the tax benefit of the available loss carryforwards.
EARNINGS PER SHARE
Effective December 31, 2000, we adopted the new recommendations of the CICA
with respect to the calculation of earnings per share. Under the new
recommendations, basic earnings per share are calculated using the weighted
average number of common shares outstanding during the year. The computation of
diluted earnings per share assumes the basic weighted average number of common
shares outstanding during the year is increased to include the number of
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. We applied the new recommendations
retroactively to restate all diluted earnings per share amounts in this MD&A,
and in the audited consolidated financial statements.
BUSINESS ACQUISITIONS
2000 ACQUISITIONS
INTELLIGENT POLYMERS
In July 1997, Intelligent Polymers was formed to fund the development of
once-daily controlled-release branded generic products for chronic disease
states, such as anxiety, depression, pain management, and diabetes. In September
1997, we concluded a development and license agreement with Intelligent
Polymers, whereby we would develop the products on their behalf. Through an
initial public offering in October 1997, Intelligent Polymers raised net
proceeds of $69.5 million that were used to make payments for our development
activities, which included formulation development, toxicology studies, clinical
testing, and the pursuit of regulatory approvals.
In December 1999, we exercised our option to acquire the rights to the
generic version of Procardia XL, that we developed on behalf of Intelligent
Polymers, for $25 million. We capitalized the right to Procardia XL, and are
amortizing it over its estimated useful life of ten years.
We, as holder of all the special shares of Intelligent Polymers, had an
option to purchase all of Intelligent Polymers' common shares at pre-established
prices on or before September 30, 2002. On September 29, 2000, we sold all of
our special shares of Intelligent Polymers to IPL Acquireco 2000 Ltd. ["IPL
ACQUIRECO"], in exchange for 12,000 non-voting common shares of IPL Acquireco,
valued at $12,000. In addition, we invested $141.5 million in non-voting Class A
shares of IPL Acquireco. On the same date, IPL Acquireco, as holder of the
special shares of Intelligent Polymers, consummated the purchase of all the
issued and outstanding common
35
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN U.S. DOLLARS)
shares of Intelligent Polymers and thereby Intelligent Polymers became a
wholly-owned subsidiary of IPL Acquireco. Following its acquisition by IPL
Acquireco, Intelligent Polymers took over the development of its products,
including directly contracting with, and making payments to, third parties.
On December 29, 2000, we exercised our option to purchase all the voting
common shares of IPL Acquireco for a total redemption price of $6.8 million.
Upon the acquisition of IPL Acquireco, we repaid the bank credit facility of
Intelligent Polymers, which amounted to $56.6 million. Accordingly, the total
consideration for the acquisition of IPL Acquireco, including the value of the
Class A and special shares, was $204.9 million. Included in the net assets of
Intelligent Polymers acquired, was the right to a cardiovascular product valued
at $5 million.
As a result of this transaction, we recorded acquired research and
development of $208.4 million. At the date of acquisition, the products under
development were in various stages of completion, had not reached technological
feasibility, and had no known alternative uses. The efforts required to complete
the products in development include the completion of the development stages of
the products, clinical-trial testing, FDA approval, and commercialization. The
principal risks relating to the products in development are the outcomes of the
formulation development, clinical studies and regulatory filings. At the date of
acquisition, none of the products had been submitted for approval with the FDA.
Since pharmaceutical products cannot be marketed without regulatory approvals,
we will not receive any benefits unless regulatory approval is obtained.
CARDIZEM-REGISTERED TRADEMARK- PRODUCTS
On December 28, 2000, we acquired the North American rights to the
Cardizem-Registered Trademark- product line [THE "CARDIZEM-REGISTERED TRADEMARK-
PRODUCTS"] from Aventis. Cardizem-Registered Trademark- is a leading calcium
channel blocker prescribed for the treatment of hypertension and angina. We
acquired all the intangible assets associated with the products including the
patents, regulatory files, trademarks, manufacturing know-how, copyrights and
other intellectual property. We will pay Aventis total consideration of
$409.5 million, of which $239.5 million was paid at closing. The remaining
$170 million will be paid equally over the four quarters of 2001, and has been
appropriately discounted for valuation purposes. We obtained beneficial rights
to and interest in the Cardizem-Registered Trademark- Products effective
December 31, 2000, and will obtain full legal rights and title on December 31,
2001. Accordingly, we will begin to recognize the financial benefits of this
acquisition in 2001. The acquisition of the Cardizem-Registered Trademark-
Products has been accounted for under the purchase method. The purchase price
has been allocated entirely to intangible assets, which will be amortized over
their estimated useful lives of twenty years.
This acquisition gives us a well-established brand name and is expected to
contribute to our growth strategy in a number of ways, such as:
- We expect the acquisition of the Cardizem-Registered Trademark- Products
to generate significant incremental product sales revenue in 2001, a level
that reflects the decline in sales of the Cardizem-Registered Trademark-
brand following genericization in 1999
- We have expanded our portfolio of products offered in both Canada and the
United States, which in turn reduces our reliance on any particular
product
- We intend to capitalize on the competitive advantage of the
Cardizem-Registered Trademark- brand name by attaching it to our improved
once-daily diltiazem product, to be named Cardizem-Registered Trademark-
XL, which is expected to be launched in 2002
- We believe this acquisition effectively leverages our existing sales and
marketing infrastructure in Canada through Crystaal, and in the United
States through DJ Pharma
36
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN U.S. DOLLARS)
In order to achieve an orderly changeover of the
Cardizem-Registered Trademark- Products from Aventis to ourselves, we have
entered into a number of transitional agreements with Aventis. Aventis will
continue to manufacture, supply and provide distribution services for a
specified period.
DJ PHARMA (RENAMED BIOVAIL PHARMACEUTICALS INC.)
On October 6, 2000, we acquired DJ Pharma, a pharmaceutical sales and
marketing company with approximately 300 sales representatives. DJ Pharma was
organized to market and sell patented and branded generic prescription
pharmaceutical products for the treatment of respiratory and allergy conditions,
and for skin and soft tissue infections. DJ Pharma obtained the rights to the
Keftab, Dura-Vent and Rondec product lines from Dura Pharmaceuticals, Inc.
["DURA"], and has the exclusive rights to sell and market Schering Corporation's
antibiotic Cedax in the United States. The purchase price was $165.1 million
including costs of acquisition, plus the assumption of $34.2 million of debt. We
have accounted for the acquisition of DJ Pharma under the purchase method. The
net assets of DJ Pharma acquired included a provision for restructuring costs of
$1.6 million, including $1.3 million for the termination of employees. The
assets, liabilities, revenue and expenses of DJ Pharma have been included in our
consolidated financial statements since October 6, 2000.
As a result of this acquisition, we obtained the rights to the Keftab,
Dura-Vent, Rondec and Cedax products valued, using a income approach at
$130.5 million, to be amortized over their estimated useful lives of ten or
twenty years. We also obtained a trained workforce and infrastructure that has
been valued, using a cost approach at $5.2 million, with an expected useful life
of six years. Goodwill arising on the acquisition of DJ Pharma was valued at
$103.4 million, and will be amortized over its estimated useful life of twenty
years. Subsequent to the acquisition date, we agreed with Dura to repay the debt
assumed and to settle all remaining license obligations. In doing so we obtained
full ownership of the Dura-Vent and Rondec product lines, and were assigned the
license to the Keftab product line.
The acquisition of DJ Pharma was significant to our strategy of becoming a
fully integrated pharmaceutical company. Prior to the acquisition of DJ Pharma,
we had no direct access to the United States market and were reliant on our
marketing partners. With the acquisition of DJ Pharma we are strengthened in a
number of ways, such as:
- We obtained an existing sales force to complement our Canadian Crystaal
operation, thereby giving us direct control over our marketing efforts
throughout North America
- We gained immediate access to an existing revenue stream from DJ Pharma's
portfolio of products
- We enhanced the value of our branded product pipeline through our ability
to direct market, and thereby retain a larger percentage of the profit
- We have greater ability to in-license and market products for third
parties
- We have increased our bargaining power in the out-licensing of products
In short, this acquisition dramatically enhances the value of our product
pipeline and provides an infrastructure upon which we can expand and grow to
meet our increasing portfolio of products. In fact, we see a near term need to
expand the DJ Pharma sales force to capitalize on the acquisition of the
Cardizem-Registered Trademark- Products, particularly once we begin to market
our Cardizem-Registered Trademark- XL product in 2002.
On March 7, 2001, Eli Lilly & Company ("Eli Lilly") announced a voluntary
recall of Keftab tablets because of undefined problems with stability. We
believe Eli Lilly is responsible for manufacturing and supplying acceptable
products to us, as well as for the cost of the recall.
37
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN U.S. DOLLARS)
1999 ACQUISITION
FUISZ TECHNOLOGIES LTD. (RENAMED BIOVAIL TECHNOLOGIES LTD.)
On November 12, 1999, we acquired Fuisz in order to enhance our available
drug delivery technologies. Fuisz is engaged in the development, manufacturing
and commercialization of wide range of drug delivery, nutraceutical and food
ingredient products utilizing its proprietary CEFORM-Registered Trademark-,
SHEARFORM-Registered Trademark- and other drug delivery technologies
["FLASHDOSE"].
The total consideration paid for Fuisz consisted of $75.6 million in cash,
and shares worth $96.0 million. In addition, we incurred costs related to the
acquisition of $6.3 million in 1999, and an additional $9.8 million in 2000. We
accounted for the acquisition of Fuisz as a step acquisition under the purchase
method of accounting. The net assets of Fuisz acquired included a provision for
restructuring costs of $13.6 million, including $11.3 million for the settlement
of contracts, and $1.3 million for the termination of employees. Certain
operations of Fuisz were not considered strategic to our business plans, and
accordingly were sold. We did not recognize any gain or loss on these
transactions, because these operations were included at fair value in the
purchase price allocation on November 12, 1999.
In our 1999 consolidated financial statements, we recognized a $1.6 million
equity loss reflecting our 49% equity interest in the results of Fuisz for the
period from September 4, 1999, the date we acquired significant influence, to
November 12, 1999, the date we acquired control. The assets, liabilities,
revenue and expenses of Fuisz have been included in our consolidated financial
statements since November 12, 1999.
As at the date of acquisition, Fuisz was involved with seventeen product
development projects, which were in various stages of completion, none of which
had received regulatory approval, and were considered to have no alternative
future use other than for the therapeutic indications for which they were being
developed. Accordingly, the technological feasibility of the projects was not
established at the acquisition date and was considered to be research and
development. The work remaining to complete the products in development involved
on-going formulation, bioequivalency, safety and efficacy studies and the
submission of regulatory filings to seek marketing approvals. The principal
risks relating to the acquired technology were the outcomes of such clinical
trials and our ability to negotiate acceptable commercial terms with the
pharmaceutical companies developing the products. As pharmaceutical products
cannot be marketed without regulatory approvals, we will not receive any
benefits from these products unless this approval is obtained.
If the projects under development are successful, we expect that the Fuisz
drug delivery technology will have an extended life cycle. Because the
technology is based on drug delivery, the technology can be applied to numerous
products. Although the risk of technological feasibility is always present in
each product, our strategy is to exploit the technology through numerous product
developments, which we expect will occur over at least fifteen years from the
date of acquisition.
In April 2000, one of the products under development at the time of
acquisition received approval from the Medical Control Agency in the United
Kingdom. The product, a FlashDose form of ibuprofen, represents the first
commercial introduction of a product utilizing the Fuisz drug delivery
technology. We are manufacturing the product, under the name Nurofen Meltlets,
for Boots Healthcare International.
RESULTS OF OPERATIONS
Total revenue in 2000 was $311.5 million, an increase of 89% from
$165.1 million in 1999 which, in turn, was 67% higher than 1998 total revenue of
$98.8 million. Net income attributable to common shareholders for 2000,
1999 and 1998 was $81.2 million, $51.1 million and $31.4 million, respectively.
Diluted earnings per share for 2000, 1999 and 1998 were $0.57, $0.47 and $0.29,
respectively.
38
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN U.S. DOLLARS)
The results for 2000 include a charge of $20.0 million for the premium paid
to extinguish our 10 7/8% U.S. Dollar Senior Notes [THE "SENIOR NOTES"].
Excluding the effect of this charge, net income attributable to common
shareholders and diluted earnings per share for 2000 would have been
$101.2 million and $0.71, respectively, reflecting increases of 98% and 51%,
respectively compared to 1999.
Overall, our growth in 2000 was driven by the contribution from a number of
new products in our generic portfolio, the inclusion of DJ Pharma from October
6, 2000, and increased research and development activities undertaken for
Intelligent Polymers prior to September 29, 2000. We experienced a decrease in
licensing activity in 2000 compared to 1999 as we implemented our strategy to
direct market our branded products through our sales and marketing operations.
Our growth in 1999 was attributable to higher Tiazac-Registered Trademark- sales
and the launch of four products in Canada, and more research and development
work done on behalf of third parties and Intelligent Polymers.
REVENUE
The following table displays, for each year indicated, the percentage of
each source of revenue to total revenue, and the percentage change in the dollar
amount of each source and the total as compared to the prior year.
PERCENTAGE
YEAR ENDED CHANGE
--------------------------------------------------------------- -------------------
2000 1999 1998
------------------- ------------------- ------------------- 1999 TO 1998 TO
$000S % $000S % $000S % 2000 1999
-------- -------- -------- -------- -------- -------- -------- --------
Product sales........................... 224,996 72 100,026 61 69,654 70 125% 44%
Research and development................ 69,121 22 54,860 33 17,570 18 26% 212%
Royalty and licensing................... 17,340 6 10,206 6 11,612 12 70% (12)%
------- --- ------- --- ------ --- --- ----
Total revenue........................... 311,457 100 165,092 100 98,836 100 89% 67%
======= === ======= === ====== === === ====
PRODUCT SALES
In 2000, product sales were $225.0 million, compared to $100.0 million in
1999, and $69.7 million in 1998. Product sales comprised 72% of total revenue in
2000, compared to 61% and 70% in 1999 and 1998, respectively.
The 125% increase in product sales in 2000 compared to 1999, was due to the
combination of further market penetration of our Tiazac-Registered Trademark-
brand, several successful generic product launches, and the incremental revenues
from sales of DJ Pharma's product portfolio since October 6, 2000. Sales of our
principal product Tiazac-Registered Trademark-, in the United States and Canada,
increased by 23% in 2000 compared to 1999, however, as a percentage of total
product sales, Tiazac-Registered Trademark- declined to 38% in 2000 from 70% in
1999, as sales of our generic products and the inclusion of DJ Pharma have
reduced our dependence on this product. The growth in our generic product sales
was a combination of increased market share of products launched in 1999
including our generic versions of Cardizem-Registered Trademark- CD, Trental and
Verelan, and new product launches this year including our generic versions of
Voltaren XR, Adalat CC and Procardia XL. Our generic products are sold through
our marketing partner, Teva Pharmaceuticals USA, Inc. ["TEVA"]. Teva launched
our generic version of Voltaren XR in February 2000, following receipt of FDA
approval. Adalat CC 30mg dosage was launched in March 2000, which was six months
earlier than scheduled as we had acquired the exclusive marketing rights to Elan
Corporation, plc's ["ELAN"] version of the drug in October 1999. In
September 2000, we obtained final FDA approval for Procardia XL 60mg dosage, and
in December 2000, our Adalat CC 60mg dosage was approved by
39
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN U.S. DOLLARS)
the FDA. Teva immediately launched both of these products. In total, our sales
of generic products increased by 265% over 1999, and represented approximately
40% of total product sales in 2000, compared to approximately 25% in 1999.
Product sales in 1999 increased by 44% compared to 1998, attributable to
strong sales of Tiazac-Registered Trademark- in the United States, through our
marketing partner Forest Laboratories Inc. ["FOREST"], the launch of our generic
versions of Cardizem-Registered Trademark- CD, Trental and Verelan, and the
additions of Brexidol, Retavase, Celexa and Cardiac STATus to the Crystaal
portfolio.
RESEARCH AND DEVELOPMENT
Research and development revenues were $69.1 million in 2000, compared to
$54.9 million in 1999, and $17.6 million in 1998. Research and development
activities comprised 22% of total revenue in 2000, compared to 33% and 18% in
1999 and 1998, respectively.
Research and development revenues increased by 26% in 2000 over 1999 which,
in turn, were 212% higher than in 1998. The increase over the past two years
came largely from services rendered to Intelligent Polymers, which expanded as
certain of the products under development advanced from the formulation
development stage to scale-up, and into clinical trials. After September 2000,
Intelligent Polymers took over the development of its products, and accordingly
we did not earn any revenue from Intelligent Polymers in the fourth quarter of
2000. We earned revenue of $55.2 million from Intelligent Polymers for the
period ended September 2000, and $34.1 million and $10.1 million for 1999 and
1998, respectively. We also experienced year over year increases in performance
from our contract research facility, measured in terms of patient bed nights and
blood samples analyzed. We also have agreements with Teva, covering the
development of certain generic oral controlled-release products, and with H.
Lundbeck A/S, for a controlled-release formulation of the anti-depressant
Citalopram.
ROYALTY AND LICENSING
Royalty and licensing activities generated revenues of $17.3 million,
$10.2 million and $11.6 million, in 2000, 1999 and 1998, respectively. Royalty
and licensing revenues comprised 6% of total revenue in both 2000 and 1999, and
12% in 1998.
The 70% increase in royalty and licensing revenue in 2000 compared to 1999,
and conversely the 12% decrease from 1998 to 1999, corresponds to the level of
royalty income we earned in each of these years. Royalty income increased to
$14.5 million in 2000, compared to $9.3 million and $10.5 million in 1999 and
1998, respectively. In the years presented, most of our royalties are derived
from sales of Tiazac-Registered Trademark- to Forest. The increase in 2000
reflects higher Tiazac-Registered Trademark- product sales, while the decline in
1999 compared to 1998 reflected reduced royalties on Oruvail sales in the United
States, where a competing generic product was introduced.
40
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN U.S. DOLLARS)
OPERATING EXPENSES
The following table displays, for each year indicated, the percentage of
each expense item to total revenue, and the percentage change in the dollar
amount of each item and the total as compared to the prior year.
PERCENTAGE
YEAR ENDED CHANGE
--------------------------------------------------------------- -------------------
2000 1999 1998
------------------- ------------------- ------------------- 1999 TO 1998 TO
$000S % $000S % $000S % 2000 1999
-------- -------- -------- -------- -------- -------- -------- --------
Cost of goods sold........................ 68,031 22 35,078 21 28,593 29 94% 23%
Research and development.................. 61,823 20 34,515 21 17,490 18 79% 97%
Selling, general and administrative....... 65,380 21 31,382 19 17,608 17 108% 78%
------- -- ------- -- ------ -- --- --
Total expenses............................ 195,234 63 100,975 61 63,691 64 93% 59%
======= == ======= == ====== == === ==
COST OF GOODS SOLD AND GROSS MARGINS
Cost of goods sold was $68.0 million in 2000 compared to $35.1 million in
1999, and $28.6 million in 1998, reflecting increases of 94% from 1999 to 2000,
and 23% from 1998 to 1999. The year over year increases were the result of
increased sales volumes from new product launches and product acquisitions, and
higher sales levels of existing products. As a percentage of total revenue, cost
of goods sold increased in 2000 compared to 1999 and declined compared to 1998,
which reflects the trend in product sales as a percentage of total revenue.
Gross margins based on product sales in 2000, 1999 and 1998 were 70%, 65%
and 59%, respectively. Our gross margins were impacted year to year by sales
volumes, pricing, product mix, and manufacturing volumes. The increase in gross
margin in 2000 compared to 1999 reflected the significantly higher proportion of
generic products in the overall mix, as these products can often contribute
higher margins than Tiazac-Registered Trademark-. As well, the inclusion of
DJ Pharma's directly marketed products had a positive impact on the overall
margin. The increase in gross margin in 1999 compared to 1998 was due in part to
higher trade compared with sample sales of Tiazac-Registered Trademark- to
Forest. Trade supplies are sold at a higher price than samples and have a lower
cost due to less packaging and labour. Also contributing to the improvement in
1999 were the launches of generic versions of Cardizem-Registered Trademark- CD
and Verelan.
RESEARCH AND DEVELOPMENT
Research and development expense was $61.8 million in 2000 compared to
$34.5 million in 1999 and $17.5 million in 1998. Research and development costs
have increased significantly in dollar terms, but have remained relatively
constant as a percentage of total revenue, fluctuating between 18% and 21%. The
year over year increases primarily reflected higher costs associated with the
development of branded generic products on behalf of Intelligent Polymers, as
these projects advanced into later stages. We did not incur any costs on these
projects in the fourth quarter of 2000, as Intelligent Polymers took over the
development of these products. The cost of providing these services to
Intelligent Polymers was $35.2 million for period ended September 29, 2000, and
$19.8 million and $6.7 million for the years ended December 31, 1999 and 1998,
respectively.
Also contributing to the 79% increase in 2000 compared to 1999, and to a
lesser degree to the 97% increase from 1998 to 1999, was the inclusion of the
amortization of Fuisz's acquired research and development, amounting to
$9.2 million and $1.3 million in 2000 and 1999 respectively, and costs related
to the development of FlashDose products. We also incurred higher costs at our
contract research facility in proportion to the increased level of activity
performed there for third party clients.
41
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN U.S. DOLLARS)
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $65.4 million,
$31.4 million and $17.6 million in 2000, 1999 and 1998, respectively. These
expenses were 21% of total revenue in 2000, compared to 19% and 17% in 1999 and
1998, respectively. The 108% increase in selling, general and administrative
expenses in 2000 compared to 1999 was mainly due to the acquisitions of, and the
related amortization expense associated with, DJ Pharma and Fuisz. In addition,
included in 2000 was a $7.5 million charge for additional costs related to the
acquisition of Fuisz. These costs were not provided for at the date of the
acquisition and, accordingly, were charged to net income. The increase in
selling, general and administrative expenses arising from the acquisition of
DJ Pharma and Fuisz was $28.7 million in 2000, and $3.6 million in 1999 relating
only to Fuisz. Excluding the incremental costs of these acquisitions, adjusted
selling, general and administrative expenses would have been approximately
$37 million and $28 million in 2000 and 1999, respectively, and 1998 would be
unchanged at $17.6 million.
Between 2000 and 1999, adjusted selling, general and administrative expenses
increased by 32%, however declined as a percentage of revenue from 17% in 1999
to 12% in 2000. This decline reflects a December 2000 agreement we entered into
with Aventis to dismiss our lawsuit against them. Our lawsuit, which we
initiated in 1998, alleged interference with our ability to market products that
would compete with Cardizem-Registered Trademark- CD in the United States and
Canada. Under the terms of the agreement, Aventis reimbursed us for expenses we
incurred during 2000 in pursuing the litigation, and for other expenses incurred
reasonably related to the litigation. A portion of these costs was included in
selling, general and administrative expenses. Accordingly, in the fourth quarter
of 2000, we recorded the pertinent share of this reimbursement to reduce
selling, general and administrative expenses. We did not record any amount in
excess of the expenses we had directly incurred during 2000 related to this
matter, nor did we receive any reimbursement for costs incurred during 1999,
which has contributed to the percentage decline, relative to revenue, of
adjusted selling, general and administrative expenses between the two years.
The increase in adjusted selling, general and administrative expenses in
1999 compared to 1998 was due to the expansion of our sales force at Crystaal
and higher advertising and promotion expenditures associated with the launch of
Brexidol, Retavase, Celexa and Cardiac STATus.
NON-OPERATING ITEMS
INTEREST INCOME AND EXPENSE
Interest income was earned on our investment portfolio, which is comprised
of high-grade commercial paper and U.S. government treasury bills. For the
period from November 1998 to March 2000, interest expense was primarily related
to our Senior Notes. Prior to this time, interest expense related to bank
borrowings, which were repaid using the proceeds from the Senior Notes offering.
In March 2000, we redeemed our Senior Notes using the proceeds from our
concurrent offering of common shares and 6.75% Convertible Subordinated
Preferred Equivalent Debentures [THE "DEBENTURES"], and accordingly interest
expense since this time primarily related to the Debentures. Interest on the
Debentures was deducted from net income to determine net income attributable to
common shareholders.
With the exclusion of interest on the Debentures, net interest income was
$19.1 million in 2000, compared to net interest expense of $9.2 million and
$1.7 million in 1999 and 1998, respectively. Net interest income in 2000
reflects an increase in the average size of our investment portfolio following
the concurrent offering, and prior to our acquisitions of Intelligent Polymers,
the Cardizem-Registered Trademark- Products and DJ Pharma. Interest expense in
1999 increased significantly from 1998 due to the inclusion of a full year of
interest on the Senior Notes.
42
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN U.S. DOLLARS)
PREMIUM PAID ON EARLY REDEMPTION OF U.S. DOLLAR SENIOR NOTES
The total consideration paid to repurchase our Senior Notes 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 amount reported
in 2000 includes the premium paid, and $4.0 million of deferred financing costs
associated with the Senior Notes that were written-off.
GAIN ON DISPOSAL OF LONG-TERM INVESTMENTS
In 1999, we disposed of certain long-term investments, which we had acquired
in 1998, for a net gain of $1.9 million.
PROVISION FOR 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
$5.8 million, $4.2 million and $2.0 million in 2000, 1999 and 1998,
respectively. The provision for 2000 included a $3.6 million reversal of the
future tax liability related to Fuisz's acquired research and development.
Excluding the reversal the provisions for income taxes reflect effective tax
rates on income before taxes, excluding non-deductible amounts, of approximately
8%, 7% and 6% in 2000, 1999 and 1998, 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 we
have experienced some upward movement in our effective tax rate, as these
operations earn income predominately in the United States.
INTEREST ON CONVERTIBLE SUBORDINATED PREFERRED EQUIVALENT DEBENTURES
The value of the Debentures is comprised of the holder conversion option and
the interest and principal components. The interest and principal components
were discounted at a rate of interest that would have approximated the rate
applicable to non-convertible debt at the time the Debentures were issued, with
the residual amount being ascribed to the holder conversion option. The present
value of the interest and principal components are being accreted to the face
value of the payments over the three-year period preceding the first redemption
date on March 31, 2003.
Interest on the Debentures was comprised on cash interest paid of
$15.8 million, and the accretion of the principal and interest components of
$12.5 million.
EBITDA
EBITDA, defined as earnings before interest, taxes, depreciation and
amortization, and excluding the premium paid, equity loss, and net gains, was
$146.4 million, $74.3 million, and $40.1 million in 2000, 1999 and 1998,
respectively.
NET INCOME (LOSS) IN ACCORDANCE WITH U.S. GAAP
Under U.S. GAAP, the net loss in 2000 was $148.0 million, or a diluted loss
per share of $1.16, compared to the 1999 net loss of $110.0 million, or a
diluted loss per share of $1.07, and the 1998 net income of $41.6 million, or
diluted earnings per share of $0.38.
43
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN U.S. DOLLARS)
For purposes of reconciling our consolidated results under Canadian GAAP to
those under U.S. GAAP the most significant adjustments were as follows:
ACQUIRED RESEARCH AND DEVELOPMENT
Under U.S. GAAP, acquired research and development having no alternative
future use must be written-off at the time of acquisition. Under U.S. GAAP, we
recorded a $208.4 million one-time charge in 2000 for acquired research and
development related to the acquisition of Intelligent Polymers. In 1999, we
recorded a $137.5 million one-time charge for acquired research and development
related to the acquisition of Fuisz, and we expensed the $25 million paid to
Intelligent Polymers for the rights to Procardia XL. Under Canadian GAAP, the
acquired research and development has been capitalized and is being amortized
over its estimated useful life. Amortization expense under Canadian GAAP
amounted to $9.8 million in 2000, and $1.3 million in 1999.
REVENUE RECOGNITION
Under U.S. GAAP, pursuant to SAB 101 the cumulative effect of the change in
accounting principle on prior years resulted in a $43.5 million charge to the
net loss in 2000. Under Canadian GAAP, the effect of the change in accounting
policy for revenue recognition was recorded on a retroactive basis as an
adjustment to prior years' reported revenue and net income.
DEBENTURES
Under U.S. GAAP, no portion of the proceeds from the issuance of the
Debentures was attributed to the conversion feature. Accordingly, under
U.S. GAAP there was no charge to interest expense for the accretion of the
interest and principal components.
GOODWILL AND INTANGIBLE ASSETS
The increase in goodwill from $38.5 million at December 31, 1999 to
$106.9 million at December 31, 2000, reflected the acquisition of DJ Pharma. The
increase in intangible assets to $1.0 billion at December 31, 2000 from
$206.7 million at December 31, 1999, primarily reflects the acquisition of the
Cardizem-Registered Trademark- Products valued at $406.1 million, Intelligent
Polymers' acquired research and development of $208.4 million, and the value
assigned to the DJ Pharma product portfolio of $154.1 million. In addition,
under amendments to our marketing agreement with Elan for Adalat CC 30mg, we
have agreed to make minimum license payments to Elan over six years in the
aggregate amount of $73.5 million, which we have capitalized at the discounted
value of $64.7 million.
We review long-lived assets for impairment whenever events or changes in
circumstance indicate that the carrying amount of the assets may not be
recoverable. In doing so, we compare the carrying amount to the related,
estimated discounted future net cash flows.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, we had cash and cash equivalents of $125.1 million
compared to cash, cash equivalents, and short-term investments of
$232.7 million at December 31, 1999. In December 2000, we arranged a
$300 million revolving term Senior Secured Credit Facility [THE "CREDIT
FACILITY"] that, subject certain covenants, permits us to borrow funds for
general corporate purposes including acquisitions. At December 31, 2000, we had
borrowed $210 million from the Credit Facility to finance the initial payment
for the Cardizem-Registered Trademark- Products.
44
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN U.S. DOLLARS)
At December 31, 2000, we had total long-term obligations of $438.7 million,
including the current portion thereof. Long-term obligations consisted of the
$210 million drawn on the Credit Facility, $161.8 million discounted amount
owing to Aventis for the Cardizem-Registered Trademark- Products, $58.1 million
owing to Elan under the amended Adalat CC 30mg marketing agreement, and
$8.8 million of other obligations. At December 31, 1999, we had $137.5 million
of long-term obligations, including $125 million of our Senior Notes.
Also at December 31, 2000, we had $300.0 million face value of Debentures
outstanding, which are due March 31, 2025. The Debentures are presented within
shareholders' equity to reflect our option to pay the interest and principal
using the proceeds from the sale of our common shares or other equity
securities. The $301.3 million reported amount of the Debentures was comprised
of the value of the discounted principal and interest components of
$257.8 million net of financing costs, and the value of the holder conversion
option of $43.5 million. The Debentures are convertible at any time into our
common shares at $30.337 per common share, and may be redeemed at our option
beginning on March 31, 2003 at prescribed redemption prices. We have the special
right to redeem the Debentures if the trading price of our common shares equals
or exceeds $45.505 on the New York Stock Exchange for a specified period,
subject to certain restrictions. Interest on the Debentures is payable quarterly
in arrears. Subject to certain conditions, we have the right to defer the
payment of interest for up to twenty consecutive quarters. Interest and
principal are payable in cash or, at our option, using the proceeds from the
sale of our common shares or other equity securities.
At December 31, 2000, our working capital ratio was 0.9:1 compared to 4.1:1
at December 31, 1999. This decline was primarily due to a lower cash, cash
equivalents and short-term investment balances, and an increase in the current
portion of long-term obligations resulting from our acquisitions of DJ Pharma
and Intelligent Polymers for cash consideration, and our obligation to Aventis
for the Cardizem-Registered Trademark- Products, which is payable in 2001.
Cash provided by operating activities, after changes in non-cash operating
items, was $113.1 million in 2000 compared to $81.0 million and $53.6 million in
1999 and 1998, respectively. This increase reflects net income, after
adjustments for non-cash items, of $160.3 million in 2000 compared to
$60.9 million and $36.4 million in 1999 and 1998, respectively. We had a net
increase in non-cash operating items of $47.2 million in 2000, compared to a
decline of $20.1 million in 1999, and $17.2 million in 1998.
Net cash used in investing activities was $574.8 million, $129.4 million and
$33.0 million in 2000, 1999 and 1998, respectively. Additions to property, plant
and equipment were $15.8 million, $7.8 million and $3.9 million in 2000,
1999 and 1998, respectively, and primarily related to the expansion of our
manufacturing facilities. Business acquisitions, net of cash acquired, totaled
$614.7 million in 2000 consisting of $239.7 million for the
Cardizem-Registered Trademark- Products, $202.4 million for Intelligent
Polymers, $162.8 million for DJ Pharma, and $9.8 million of additional
consideration paid for Fuisz, compared to $43.7 million in 1999 which was
entirely related to Fuisz. We acquired the remaining rights to the Dura-Vent,
Keftab and Rondec products, and other product rights for $27.8 million in 2000.
We acquired the rights to Procardia XL for $25 million in 1999, and other
product rights and royalty interests for $13.3 million and $19 million in
1999 and 1998, respectively. The net activity in short-term investments provided
cash of $65.9 million in 2000, and used $54.7 million in 1999. In 2000, as our
short-term investments matured we converted them into cash equivalents with
original maturities of 90 days or less. Cash expended on long-term investments
was $2.5 million and $10.0 million in 2000 and 1998, respectively, and cash
received on the disposal of long-term investments was $12.0 million in 1999. In
2000, we received proceeds of $20 million on the disposal of Clonmel Healthcare
Limited, a subsidiary of Fuisz. We received cash from the repayment of Executive
Stock Purchase Plan loans of $3.1 million in 1999.
Net cash provided by financing activities was $409.0 million,
$147.9 million and $49.5 million in 2000, 1999 and 1998, respectively. Net
proceeds from the concurrent offering in March 2000 were $95.3 million from
45
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN U.S. DOLLARS)
the issue of common shares, and $288.8 million from the issue of Debentures. A
portion of these proceeds was used to repurchase our Senior Notes for
$141.0 million, which we issued in 1998 for net proceeds of $120.4 million. We
paid interest of $15.8 million on the Debentures in 2000. In October 1999, we
completed an equity offering for net proceeds of $246.1 million. Proceeds from
issue of common shares on the exercise of stock options and through our Employee
Stock Purchase Plan were $14.3 million, $7.6 million and $3.9 million in 2000,
1999 and 1998, respectively. We repurchased common shares on the open market,
under our share repurchase program, for $30.6 million and $72.1 million in
1999 and 1998, respectively. We received proceeds of $6.0 million on the
exercise of warrants in 2000. We borrowed $210 million from our Credit Facility,
and paid $3 million in arrangement fees. In 2000, we repaid the debt assumed on
the acquisition of DJ Pharma and other long-term obligations of $45.6 million.
In 1999, we repaid the debt assumed on the acquisition of Fuisz and other
long-term obligations of $75.2 million. In 1998, the net repayments of other
long-term obligations totaled $2.7 million.
Overall, our cash and cash equivalents decreased by $52.9 million in 2000,
and increased by $99.8 million and $70.0 million in 1999 and 1998, respectively.
In February 2000, we entered into an agreement to acquire a pharmaceutical
manufacturing facility located in Dorado, Puerto Rico. This acquisition closed
in January 2001, at which time we paid the remaining purchase price of
$10 million.
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.
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 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 from 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
46
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN U.S. DOLLARS)
rates would increase interest expense by approximately $2 million on an annual
basis. This risk is 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 rate of interest used to discount our
long-term obligations to Aventis and Elan is 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.
47
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 EXPRESSED IN U.S. DOLLARS)
OVERVIEW
During 2000, through strategic business acquisitions and internal growth, we
made significant progress towards becoming a fully integrated pharmaceutical
company, while maintaining our focus on the development of drugs utilizing our
advanced controlled-release, rapid dissolve, enhanced absorption and taste
masking technologies. Our successes during the year include the completion of
securities offerings that raised gross proceeds of approximately $400 million,
and provided the necessary capital to pursue our growth strategy. Our
acquisition of DJ Pharma, Inc. ("DJ Pharma"), gives us a base of product
revenues, and an experienced pharmaceuticals sales force and infrastructure in
the United States to complement our Crystaal sales and marketing operation in
Canada. Our combined North American sales force will be engaged in the
marketing, promotion and distribution of our existing proprietary and
in-licensed products, as well as DJ Pharma's product portfolio and the
Cardizem-Registered Trademark- product line that we purchased from Aventis
Pharmaceuticals Inc. ("Aventis"). In the future, we intend to direct market the
branded products that are currently in our development pipeline, the potential
of which we are now able to fully exploit following our acquisition of
Intelligent Polymers Limited ("Intelligent Polymers").
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.
The following MD&A reflects the adoption of the Securities and Exchange
Commission's ("SEC"), Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements", retroactively applied to January 1, 2000,
as required. 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 period. Of this amount, $9.3
million is included in revenue for the period. The remaining cumulative effect
adjustment has been recorded as deferred revenue. Pro forma total revenues for
1999, assuming that SAB 101 had been applied retroactively to January 1, 1999,
would have been $161.1 million.
BUSINESS ACQUISITIONS
2000 ACQUISITIONS
INTELLIGENT POLYMERS
In July 1997, Intelligent Polymers was formed to fund the development of
once-daily controlled-release branded generic products for chronic disease
states, such as anxiety, depression, pain management, and diabetes. In
September 1997, we concluded a development and license agreement with
Intelligent Polymers, whereby we would develop the products on their behalf.
Through an initial public offering in October 1997, Intelligent Polymers raised
net proceeds of $69.5 million that were used to make payments for our
development activities, which included formulation development, toxicology
studies, clinical testing, and the pursuit of regulatory approvals.
48
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN U.S. DOLLARS)
In December 1999, we exercised our option to acquire the rights to the
generic version of Procardia XL, that we developed on behalf of Intelligent
Polymers, for $25 million. As required under GAAP, the right to Procardia XL was
written-off as acquired research and development in 1999 since at the time of
acquisition the product had not received regulatory approval from the U.S.
Federal Drug Administration ("FDA"), and had no alternative future use.
We, as holder of all the special shares of Intelligent Polymers, had an
option to purchase all of Intelligent Polymers' common shares at pre-established
prices on or before September 30, 2002. On September 29, 2000, we sold all of
our special shares of Intelligent Polymers to IPL Acquireco 2000 Ltd. ("IPL
Acquireco"), in exchange for 12,000 non-voting common shares of IPL Acquireco,
valued at $12,000. In addition, we invested $141.5 million in non-voting
Class A shares of IPL Acquireco. On the same date, IPL Acquireco, as holder of
the special shares of Intelligent Polymers, consummated the purchase of all the
issued and outstanding common shares of Intelligent Polymers and thereby
Intelligent Polymers became a wholly-owned subsidiary of IPL Acquireco.
Following its acquisition by IPL Acquireco, Intelligent Polymers took over the
development of its products, including directly contracting with, and making
payments to, third parties.
On December 29, 2000, we exercised our option to purchase all the voting
common shares of IPL Acquireco for a total redemption price of $6.8 million.
Upon the acquisition of IPL Acquireco, we repaid the bank credit facility of
Intelligent Polymers, which amounted to $56.6 million. Accordingly, the total
consideration for the acquisition of IPL Acquireco, including the value of the
Class A and special shares, was $204.9 million. Included in the net liabilities
of Intelligent Polymers assumed, was the right to a cardiovascular product
valued at $5 million.
As a result of this transaction, we recorded a charge for acquired research
and development of $208.4 million, as required under GAAP. At the date of
acquisition, the products under development were in various stages of
completion, had not reached technological feasibility, and had no known
alternative uses. The efforts required to complete the products in development
include the completion of the development stages of the products, clinical-trial
testing, FDA approval, and commercialization. The principal risks relating to
the products in development are the outcomes of the formulation development,
clinical studies and regulatory filings. At the date of acquisition, none of the
products had been submitted for approval with the FDA. Since pharmaceutical
products cannot be marketed without regulatory approvals, we will not receive
any benefits unless regulatory approval is obtained.
CARDIZEM-REGISTERED TRADEMARK- PRODUCTS
On December 28, 2000, we acquired the North American rights to the
Cardizem-Registered Trademark- product line (the "Cardizem-Registered Trademark-
Products") from Aventis. Cardizem-Registered Trademark- is a leading calcium
channel blocker prescribed for the treatment of hypertension and angina. We
acquired all the intangible assets associated with the products including the
patents, regulatory files, trademarks, manufacturing know-how, copyrights and
other intellectual property. We will pay Aventis total consideration of $409.5
million, of which $239.5 million was paid at closing. The remaining $170 million
will be paid equally over the four quarters of 2001, and has been appropriately
discounted for valuation purposes. We obtained beneficial rights to and interest
in the Cardizem-Registered Trademark- Products effective December 31, 2000, and
will obtain full legal rights and title on December 31, 2001. Accordingly, we
will begin to recognize the financial benefits of this acquisition in 2001. The
acquisition of the Cardizem-Registered Trademark- Products has been accounted
for under the purchase method. The purchase price has been allocated entirely to
intangible assets, which will be amortized over their estimated useful lives of
twenty years.
49
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN U.S. DOLLARS)
This acquisition gives us a well-established brand name and is expected to
contribute to our growth strategy in a number of ways, such as:
- We expect the acquisition of the Cardizem-Registered Trademark- Products
to generate significant incremental product sales revenue in 2001, a level
that reflects the decline in sales of the Cardizem-Registered Trademark-
brand following genericization in 1999
- We have expanded our portfolio of products offered in both Canada and
United States, which in turn reduces our reliance on any particular
product
- We intend to capitalize on the competitive advantage of the
Cardizem-Registered Trademark- brand name by attaching it to our improved
once-daily diltiazem product, to be named
Cardizem-Registered Trademark- XL, which is expected to be launched in
2002
- We believe this acquisition effectively leverages our existing sales and
marketing infrastructure in Canada through Crystaal, and in the United
States through DJ Pharma
In order to achieve an orderly changeover of the
Cardizem-Registered Trademark- Products from Aventis to ourselves, we have
entered into a number of transitional agreements with Aventis. Aventis will
continue to manufacture, supply and provide distribution services for a
specified period.
DJ PHARMA (RENAMED BIOVAIL PHARMACEUTICALS INC.)
On October 6, 2000, we acquired DJ Pharma, a pharmaceutical sales and
marketing company with approximately 300 sales representatives. DJ Pharma was
organized to market and sell patented and branded generic prescription
pharmaceutical products for the treatment of respiratory and allergy conditions,
and for skin and soft tissue infections. DJ Pharma obtained the rights to the
Keftab, Dura-Vent and Rondec product lines from Dura Pharmaceuticals, Inc.
("Dura"), and has the exclusive rights to sell and market Schering Corporation's
antibiotic Cedax in the United States. The purchase price was $165.1 million
including costs of acquisition, plus the assumption of $34.2 million of debt. We
have accounted for the acquisition of DJ Pharma under the purchase method. The
net assets of DJ Pharma acquired included a provision for restructuring costs of
$1.6 million, including $1.3 million for the termination of employees. The
assets, liabilities, revenue and expenses of DJ Pharma have been included in our
consolidated financial statements since October 6, 2000.
As a result of this acquisition, we obtained the rights to the Keftab,
Dura-Vent, Rondec and Cedax products valued using a income approach at $130.5
million, which will be amortized over their estimated useful lives of ten or
twenty years. We also obtained a trained workforce and infrastructure that has
been valued using a cost approach at $5.2 million, with an expected useful life
of six years. Goodwill arising on the acquisition of DJ Pharma was valued at
$70.5 million, and will be amortized over its estimated useful life of twenty
years. Subsequent to the acquisition date, we agreed with Dura to repay the debt
assumed and to settle all remaining license obligations. In doing so we obtained
full ownership of the Dura-Vent and Rondec product lines, and were assigned the
license to the Keftab product line.
The acquisition of DJ Pharma was significant to our strategy of becoming a
fully integrated pharmaceutical company. Prior to the acquisition of DJ Pharma,
we had no direct access to the United States market and were reliant on our
marketing partners. With the acquisition of DJ Pharma we are strengthened in a
number of ways, such as:
- We obtained an existing sales force to complement our Canadian Crystaal
operation, thereby giving us direct control over our marketing efforts
throughout North America
- We gained immediate access to an existing revenue stream from DJ Pharma's
portfolio of products
50
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN U.S. DOLLARS)
- We enhanced the value of our branded product pipeline through our ability
to direct market, and thereby retain a larger percentage of the profit
- We have greater ability to in-license and market products for third
parties
- We have increased our bargaining power in the out-licensing of products
In short, this acquisition dramatically enhances the value of our product
pipeline and provides an infrastructure upon which we can expand and grow to
meet our increasing portfolio of products. In fact, we see a near term need to
expand the DJ Pharma sales force to capitalize on the acquisition of the
Cardizem-Registered Trademark- Products, particularly once we begin to market
our Cardizem-Registered Trademark- XL product in 2002.
On March 7, 2001, Eli Lilly & Company ("Eli Lilly") announced a voluntary
recall of Keftab tablets because of undefined problems with stability. We
believe Eli Lilly is responsible for manufacturing and supplying acceptable
products to us, as well as for the cost of the recall.
1999 ACQUISITION
FUISZ TECHNOLOGIES LTD. (RENAMED BIOVAIL TECHNOLOGIES LTD.)
On November 12, 1999, we acquired Fuisz Technologies Ltd. ("Fuisz") in order
to enhance our available drug delivery technologies. Fuisz is engaged in the
development, manufacturing and commercialization of a wide range of drug
delivery, nutraceutical and food ingredient products utilizing its proprietary
CEFORM-Registered Trademark-, SHEARFORM-Registered Trademark- and other drug
delivery technologies ("FlashDose").
The total consideration paid for Fuisz consisted of $75.6 million in cash,
and common shares worth $88.2 million. In addition, we incurred costs related to
the acquisition of $7.3 million in 1999, and an additional $17.3 million in
2000. We accounted for the acquisition of Fuisz as a step acquisition under the
purchase method. The net assets of Fuisz acquired included a provision for
restructuring costs of $13.6 million, including $11.3 million for the settlement
of contracts, and $1.3 million for the termination of employees. Certain
operations of Fuisz were not considered strategic to our business plans, and
accordingly were sold. We did not recognize any gain or loss on these
transactions, because these operations were included at fair value in the
purchase price allocation on November 12, 1999.
In our 1999 consolidated financial statements, we recognized a $58.4 million
equity loss reflecting our 49% equity interest in the results of Fuisz for the
period from September 4, 1999, the date we acquired significant influence, to
November 12, 1999, the date we acquired control, which included a $56.8 million
charge for acquired research and development. The assets, liabilities, revenue
and expenses of Fuisz have been included in our consolidated financial
statements since November 12, 1999.
Under GAAP, the acquisition of Fuisz resulted in a total charge of $137.5
million for acquired research and development. As at the date of acquisition,
Fuisz was involved with seventeen product development projects, which were in
various stages of completion, none of which had received regulatory approval,
and were considered to have no alternative future use other than for the
therapeutic indications for which they were being developed. Accordingly, the
technological feasibility of the projects was not established at the acquisition
date and was considered to be research and development. The work remaining to
complete the products in development involved on-going formulation,
bioequivalency, safety and efficacy studies and the submission of regulatory
filings to seek marketing approvals. The principal risks relating to the
acquired technology were the outcomes of such clinical trials and our ability to
negotiate acceptable commercial terms with the pharmaceutical companies
developing the products. As pharmaceutical products cannot be marketed without
regulatory approvals, we will not receive any benefits from these products
unless this approval is obtained.
51
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN U.S. DOLLARS)
In April 2000, one of the products under development at the time of
acquisition received approval from the Medical Control Agency in the United
Kingdom. The product, a FlashDose form of ibuprofen, represents the first
commercial introduction of a product utilizing the Fuisz drug delivery
technology. We are manufacturing the product, under the name Nurofen Meltlets,
for Boots Healthcare International.
RESULTS OF OPERATIONS
Total revenue in 2000 was $309.2 million, an increase of 79% from $172.5
million in 1999. The net loss in 2000 was $148.0 million, or a diluted loss per
share of $1.16, compared to the 1999 net loss of $110.0 million, or a diluted
loss per share of $1.07.
The results for 2000 include charges of $208.4 million for acquired research
and development, as a result of the acquisition of Intelligent Polymers, $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 of the
adoption of SAB 101, offset by $9.3 million of the cumulative effect adjustment
recognized in 2000 revenue. The results for 1999 include a charge of $105.7
million for acquired research and development, arising from the Fuisz
acquisition and the purchase of Procardia XL from Intelligent Polymers, an
equity loss in Fuisz of $58.4 million, and a net gain on the disposal of
long-term investments of $1.9 million. Excluding the effects of these charges,
net income and diluted earnings per share for 2000 would have been $114.7
million and $0.80, respectively, and net income and diluted earnings per share
for 1999 would have been $52.2 million and $0.48, respectively. Excluding the
effects of these charges, net income and diluted earnings per share increased by
120% and 67%, respectively for 2000 compared to 1999.
Overall, our growth in 2000 was driven by the contribution from a number of
new products in our generic portfolio, the inclusion of DJ Pharma from
October 6, 2000, and increased research and development activities undertaken
for Intelligent Polymers prior to September 29, 2000. We experienced a decrease
in royalty and licensing revenues in 2000 compared to 1999 due to a decline in
licensing activity, as we implemented our strategy to direct market our branded
products through our sales and marketing operations.
REVENUE
The following table displays, for 2000 and 1999, the percentage of each
source of revenue to total revenue, and the percentage change in the dollar
amount of each source and the total from 1999 to 2000.
YEAR ENDED
----------------------------------------- PERCENTAGE
2000 1999 CHANGE
------------------- ------------------- ----------
$000S % $000S %
Product sales............................................. 224,996 72 99,526 58 126%
Research and development.................................. 66,834 22 48,232 28 39%
Royalty and licensing..................................... 17,340 6 24,706 14 (30)%
------- --- ------- ---
Total revenue............................................. 309,170 100 172,464 100 79%
======= === ======= ===
PRODUCT SALES
In 2000, product sales were $225.0 million, compared to $99.5 million in
1999. Product sales comprised 72% of total revenue in 2000, compared to 58% in
1999.
The 126% increase in product sales in 2000 compared to 1999, was due to the
combination of further market penetration of our Tiazac-Registered Trademark-
brand, several successful generic product launches, and the incremental
52
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN U.S. DOLLARS)
revenues from sales of DJ Pharma's product portfolio since October 6, 2000.
Sales of our principal product Tiazac-Registered Trademark-, in the United
States and Canada, increased by 23% in 2000 compared to 1999, however as a
percentage of total product sales, Tiazac-Registered Trademark-declined to 38%
in 2000 from 70% in 1999, as sales of our generic products and the inclusion of
DJ Pharma have reduced our dependence on this product. The growth in our generic
product sales was a combination of increased market share of products launched
in 1999 including our generic versions of Cardizem CD, Trental and Verelan, and
new product launches this year including our generic versions of Voltaren XR,
Adalat CC and Procardia XL. Our generic products are sold through our marketing
partner, Teva Pharmaceuticals USA, Inc. ("Teva"). Teva launched our generic
version of Voltaren XR in February 2000, following receipt of FDA approval.
Adalat CC 30 mg dosage was launched in March 2000, which was six months earlier
than scheduled as we had acquired the exclusive marketing rights to Elan
Corporation, plc's ("Elan") version of the drug in October 1999. In
September 2000, we obtained final FDA approval for Procardia XL 60 mg dosage,
and in December 2000, our Adalat CC 60 mg dosage was approved by the FDA. Teva
immediately launched both of these products. In total, our sales of generic
products increased by 265% over 1999, and represented approximately 40% of total
product sales in 2000, compared to approximately 25% in 1999.
RESEARCH AND DEVELOPMENT
Research and development revenues were $66.8 million in 2000, compared to
$48.2 million in 1999. Research and development activities comprised 22% of
total revenue in 2000, compared to 28% in 1999.
Research and development revenues increased by 39% in 2000 over 1999. The
increase over the past year came largely from services rendered to Intelligent
Polymers, which expanded as certain of the products under development advanced
from the formulation development stage to scale-up, and into clinical trials.
After September 29, 2000, Intelligent Polymers took over the development of its
products, and accordingly we did not earn any revenue from Intelligent Polymers
in the fourth quarter of 2000. We earned revenue of $52.9 million from
Intelligent Polymers for the period ended September 29, 2000, and $29.0 million
for 1999. We also experienced an increase in performance from our contract
research facility, measured in terms of patient bed nights and blood samples
analyzed. We also have agreements with Teva, covering the development of certain
generic oral controlled-release products, and with H. Lundbeck A/S, for a
controlled-release formulation of the anti-depressant Citalopram.
ROYALTY AND LICENSING
Royalty and licensing activities generated revenues of $17.3 million and
$24.7 million, in 2000 and 1999, respectively. Royalty and licensing revenues
comprised 6% and 14% of total revenue in 2000 and 1999, respectively.
The 30% decline in royalty and licensing revenue in 2000 compared to 1999
was mainly due to licensing agreements entered into in 1999 with Mylan
Pharmaceutical Inc. and Stada Arzneimittel AG covering Verelan and Viazem,
respectively. Royalty income increased to $14.5 million in 2000, compared to
$9.3 million in 1999. In both years, most of our royalties were derived from
sales of Tiazac-Registered Trademark- to Forest. The increase in 2000 reflects
higher Tiazac-Registered Trademark- product sales.
53
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN U.S. DOLLARS)
OPERATING EXPENSES
The following table displays, for 2000 and 1999, the percentage of each
expense item to total revenue, and the percentage change in the dollar amount of
each item and the total from 1999 to 2000.
YEAR ENDED
----------------------------------------- PERCENTAGE
2000 1999 CHANGE
------------------- ------------------- ----------
$000S % $000S %
Cost of goods sold........................................ 68,031 22 35,078 20 94%
Research and development.................................. 52,659 17 33,130 19 59%
Selling, general and administrative....................... 58,088 19 38,727 23 50%
------- --- ------- ---
Total expenses............................................ 178,778 58 106,935 62 67%
======= === ======= ===
COST OF GOODS SOLD AND GROSS MARGINS
Cost of goods sold was $68.0 million in 2000 compared to $35.1 million in
1999, reflecting an increase of 94% from 1999 to 2000. The increase was the
result of increased sales volumes from new product launches and product
acquisitions, and higher sales levels of existing products. As a percentage of
total revenue, cost of goods sold increased in 2000 compared to 1999, which
reflects the level in product sales as a percentage of total revenue.
Gross margins based on product sales in 2000 and 1999 were 70% and 65%,
respectively. Our gross margins were impacted by sales volumes, pricing, product
mix, and manufacturing volumes. The increase in gross margin in 2000 compared to
1999 reflected the significantly higher proportion of generic products in the
overall mix, as these products can often contribute higher margins than
Tiazac-Registered Trademark-. As well, the inclusion of DJ Pharma's directly
marketed products had a positive impact on the overall margin.
RESEARCH AND DEVELOPMENT
Research and development expense was $52.7 million in 2000 compared to $33.1
million in 1999. Research and development costs have increased significantly in
dollar terms, but have remained relatively constant as a percentage of total
revenue. The increase primarily reflected higher costs associated with the
development of branded generic products on behalf of Intelligent Polymers, as
these projects advanced into later stages. We did not incur any costs on these
projects in the fourth quarter of 2000, as Intelligent Polymers took over the
development of these products. The cost of providing these services to
Intelligent Polymers was $35.2 million for period ended September 29, 2000, and
$19.8 million for the year ended December 31, 1999.
Also contributing to the 59% increase in 2000 compared to 1999, was the
inclusion of costs related to the development of FlashDose products. We also
incurred higher costs at our contract research facility in proportion to the
increased level of activity performed there for third party clients.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $58.1 million and $38.7
million in 2000 and 1999, respectively. These expenses were 19% of total revenue
in 2000, compared to 23% in 1999. The 50% increase in selling, general and
administrative expenses in 2000 compared to 1999 was mainly due to the
acquisitions of, and the related amortization expense associated with,
DJ Pharma and Fuisz. The increase in selling, general and administrative
expenses arising from the acquisition of DJ Pharma and Fuisz was $22.0 million
in 2000, and $3.6 million in 1999 relating only to Fuisz. Excluding the
incremental costs of these acquisitions, adjusted selling,
54
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN U.S. DOLLARS)
general and administrative expenses would have been approximately $36 million
and $35 million in 2000 and 1999, respectively.
Between 2000 and 1999, adjusted selling, general and administrative expenses
remained relatively constant in dollar terms, but declined as a percentage of
revenue. This decline reflected a reduction in the compensation cost related to
employee stock options, due to amendments to our Stock Option Plan which,
effective January 1, 2000, made the plan non-compensatory. In addition, in
December 2000 we entered into an agreement with Aventis to dismiss our lawsuit
against them. Our lawsuit, which we initiated in 1998, alleged interference with
our ability to market products that would compete with
Cardizem-Registered Trademark- CD in the United States and Canada. Under the
terms of the agreement, Aventis reimbursed us for expenses we incurred during
2000 in pursuing the litigation, and for other expenses incurred reasonably
related to the litigation. A portion of these costs was included in selling,
general and administrative expenses. Accordingly, in the fourth quarter of 2000,
we recorded the pertinent share of this reimbursement to reduce selling, general
and administrative expenses. We did not record any amount in excess of the
expenses we had directly incurred during 2000 related to this matter, nor did we
receive any reimbursement for costs incurred during 1999, which has contributed
to the percentage decline, relative to revenue, of adjusted selling, general and
administrative expenses between the two years.
ACQUIRED RESEARCH AND DEVELOPMENT
As discussed, in 2000 we incurred a one-time charge for acquired research
and development of $208.4 million as a result of our acquisition of Intelligent
Polymers. In 1999, as a result of our acquisition of Fuisz, we incurred a
one-time charge for acquired research and development of $137.5 million of which
$56.8 was included in the equity loss, and we expensed the $25 million paid to
Intelligent Polymers for Procardia XL. Under GAAP, acquired research and
development having no alternative future use must be written-off at the time of
acquisition.
NON-OPERATING ITEMS
INTEREST INCOME AND EXPENSE
Interest income was earned on our investment portfolio, which is comprised
of high-grade commercial paper and U.S. government treasury bills. For the
period from January 1999 to March 2000, interest expense was primarily related
to our Senior Notes. In March 2000, we redeemed our Senior Notes using the
proceeds from our concurrent offering of common shares and 6.75% Convertible
Subordinated Preferred Equivalent Debentures (the "Debentures"), and accordingly
interest expense since this time primarily related to the Debentures.
Net interest income of $3.0 million in 2000 compares to net interest expense
of $9.2 million in 1999. Net interest income in 2000 reflects an increase in the
average size of our investment portfolio following the concurrent offering, and
prior to our acquisitions of Intelligent Polymers, the
Cardizem-Registered Trademark- Products, and DJ Pharma. Interest expense in 1999
included a full year of interest on the Senior Notes.
GAIN ON DISPOSAL OF LONG-TERM INVESTMENTS
In 1999, we disposed of certain long-term investments, which we had acquired
in 1998, for a net gain of $1.9 million.
PROVISION FOR 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
$9.4 million and $4.2 million in 2000 and 1999, respectively. These
55
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN U.S. DOLLARS)
provisions reflected effective tax rates on income before taxes, excluding
non-deductible amounts, of approximately 7% and 6% in 2000 and 1999,
respectively. The 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 we have experienced some upward movement 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 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 2000 includes the premium paid, and $4.0 million of deferred financing costs
associated with the Senior Notes that were written-off.
EBITDA
EBITDA, defined as earnings before interest, taxes, depreciation and
amortization, and excluding acquired research and development, equity loss, and
net gains, was $151.9 million and $74.4 million in 2000 and 1999, respectively.
GOODWILL AND INTANGIBLE ASSETS
The increase in goodwill from $31.8 million at December 31, 1999 to $103.1
million at December 31, 2000, reflected the acquisition of DJ Pharma. The
increase in intangible assets to $667.4 million at December 31, 2000 from $45.5
million at December 31, 1999, primarily reflected the acquisition of the
Cardizem-Registered Trademark- Products valued at $406.1 million, and the value
assigned to the DJ Pharma product portfolio of $154.1 million. In addition,
under amendments to our marketing agreement with Elan for Adalat CC 30 mg, we
have agreed to make minimum license payments to Elan over six years in the
aggregate amount of $73.5 million, which we have capitalized at the discounted
value of $64.7 million.
We review long-lived assets for impairment whenever events or changes in
circumstance indicate that the carrying amount of the assets may not be
recoverable. In doing so, we compare the carrying amount to the related,
estimated undiscounted future net cash flows.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, we had cash and cash equivalents of $125.1 million
compared to cash, cash equivalents, and short-term investments of $232.7 million
at December 31, 1999. In December 2000, we arranged a $300 million revolving
term Senior Secured Credit Facility (the "Credit Facility") that, subject to
certain covenants, permits us to borrow funds for general corporate purposes
including acquisitions. At December 31, 2000, we had borrowed $210 million from
the Credit Facility to finance the initial payment for the
Cardizem-Registered Trademark- Products.
At December 31, 2000, we had total long-term obligations of $438.7 million,
including the current portion thereof. Long-term obligations consisted of the
$210 million drawn on the Credit Facility, $161.8 million discounted amount
owing to Aventis for the Cardizem-Registered Trademark- Products, $58.1 million
owing to Elan under the amended Adalat CC 30 mg marketing agreement, and $8.8
million of other obligations. At December 31, 1999, we had $137.5 million of
long-term obligations, including $125 million of our Senior Notes.
56
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN U.S. DOLLARS)
Also at December 31, 2000, we had $300 million of Debentures outstanding,
which are due March 31, 2025. The Debentures are convertible at any time into
our common shares at $30.337 per common share, and may be redeemed at our option
beginning on March 31, 2003 at prescribed redemption prices. We have the special
right to redeem the Debentures if the trading price of our common shares equals
or exceeds $45.505 on the New York Stock Exchange for a specified period,
subject to certain restrictions. Interest on the Debentures is payable quarterly
in arrears. Subject to certain conditions, we have the right to defer the
payment of interest for up to twenty consecutive quarters. Interest and
principal are payable in cash or, at our option, using the proceeds from the
sale of our common shares or other equity securities.
At December 31, 2000, our working capital ratio was 0.9:1 compared to 4.6:1
at December 31, 1999. This decline was primarily due to lower cash, cash
equivalents and short-term investment balances, and an increase in the current
portion of long-term obligations resulting from our acquisition of DJ Pharma and
Intelligent Polymers for cash consideration, and our obligation to Aventis for
the Cardizem-Registered Trademark- Products, which is payable in 2001.
Cash provided by operating activities, after changes in non-cash operating
items, was $102.5 million in 2000 compared to $52.0 million in 1999. This
increase reflected net income, after adjustments for non-cash items, of $149.7
million in 2000 compared to $43.7 million in 1999. We had a net increase in
non-cash operating items of $47.2 million in 2000, compared to a decline of $8.3
million in 1999.
Net cash used in investing activities was $582.3 million and $104.4 million
in 2000 and 1999, respectively. Additions to property, plant and equipment were
$15.8 million and $7.8 million in 2000 and 1999, respectively, and primarily
related to the expansion of our manufacturing facilities. Business acquisitions,
net of cash acquired, totaled $622.1 million in 2000 consisting of $239.7
million for the Cardizem-Registered Trademark- Products, $202.4 million for
Intelligent Polymers, $162.8 million for DJ Pharma, and $17.3 million of
additional consideration paid for Fuisz, compared to $43.7 million in 1999 which
was entirely related to Fuisz. We acquired the remaining rights to the
Dura-Vent, Keftab and Rondec products, and other product rights for $27.8
million in 2000, and we acquired product rights and royalty interests for $13.3
million in 1999. The net activity in short-term investments provided cash of
$65.9 million in 2000, and used $54.7 million in 1999. In 2000, as our
short-term investments matured we converted them into cash equivalents with
original maturities of 90 days or less. Cash expended on long-term investments
was $2.5 million in 2000, and cash received on the disposal of long-term
investments was $12.0 million in 1999. In 2000, we received proceeds of $20
million on the disposal of Clonmel Healthcare Limited, a subsidiary of Fuisz. We
received cash from the repayment of Executive Stock Purchase Plan loans of $3.1
million in 1999.
Net cash provided by financing activities was $427.1 million and $151.9
million in 2000 and 1999, respectively. Net proceeds from the concurrent
offering in March 2000 were $95.3 million from the issue of common shares, and
$288.8 million from the issue of Debentures. A portion of these proceeds was
used to repurchase our Senior Notes for $141.0 million. In October 1999, we
completed an equity offering for net proceeds of $246.1 million. Proceeds from
issue of common shares on the exercise of stock options and through our Employee
Stock Purchase Plan were $14.3 million and $7.6 million in 2000 and 1999,
respectively. We repurchased common shares on the open market, under our share
repurchase program, for $30.6 million in 1999. We received proceeds of $6.0
million on the exercise of warrants in 2000. We collected $2.3 million and $4.0
million of the warrant subscription receivable in 2000 and 1999, respectively.
We borrowed $210 million from our Credit Facility, and paid $3 million in
arrangement fees. In 2000, we repaid the debt assumed on the acquisition of
DJ Pharma and other long-term obligations of $45.6 million. In 1999, we repaid
the debt assumed on the acquisition of Fuisz and other long-term obligations of
$75.2 million.
Overall, our cash and cash equivalents decreased by $52.9 million in 2000,
and increased by $99.8 million in 1999.
57
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN U.S. DOLLARS)
In February 2000, we entered into an agreement to acquire a pharmaceutical
manufacturing facility located in Dorado, Puerto Rico. This acquisition closed
in January 2001, at which time we paid the remaining purchase price of $10
million.
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.
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 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 from 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 increase interest expense by approximately $2 million on
an annual basis. This risk is 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 rate of interest used to discount our
long-term obligations to Aventis and Elan is 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.
58
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN U.S. DOLLARS)
RECENT ACCOUNTING DEVELOPMENTS
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS No. 137 and SFAS
No. 138. Accordingly, SFAS No. 133 will be effective for our financial
statements beginning January 1, 2001. SFAS No. 133 requires a company to
recognize all derivative instruments as assets or liabilities in its balance
sheet and to measure them at fair value. We believe the adoption of SFAS
No. 133 will not result in any cumulative effect adjustment in our consolidated
statements of income (loss).
59
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND OFFICERS OF THE COMPANY
The name, municipality of residence, their ages as of May 18, 2001 and
position with the Company of each of the directors and executive officers are
set forth below:
NAME(1) AGE POSITION
------- -------- -----------------------------------------
Eugene N. Melnyk................................... 41 Chairman of the Board and Director
St. Philip, Barbados
Bruce D. Brydon.................................... 54 Chief Executive Officer and Director
Milton, Ontario, Canada
William S. Poole................................... 54 President, North American Pharmaceuticals
Raleigh, North Carolina, USA
Kenneth C. Cancellara, Q.C......................... 54 Senior Vice President, General Counsel,
Toronto, Ontario, Canada Secretary
Rolf K. Reininghaus................................ 55 Senior Vice President and Director
Mississauga, Ontario, Canada
Paul W. Haddy(2)................................... 48 Director
Christ Church, Barbados
Wilfred G. Bristow(2).............................. 68 Director
Campbellville, Ontario, Canada
Roger Rowan(2)..................................... 47 Director
Toronto, Ontario Canada
Robert Vujea....................................... 75 Director
Grand Rapids, Michigan, USA
Brian H. Crombie................................... 41 Senior Vice President and
Mississauga, Ontario, Canada Chief Financial Officer
------------
(1) Directors serve one year terms.
(2) Member of the Audit Committee.
MR. MELNYK has been the Chairman of the Board and a Director since
March 29, 1994, the effective date of the amalgamation (the "Amalgamation") of
the Company's predecessor entities, Biovail Corporation International ("BCI")
and Trimel Corporation ("Trimel"). Prior to that time, he had been the Chairman
of the Board of BCI since October 1991 and was instrumental in acquiring,
financing and organizing the companies or businesses that comprised BCI.
Mr. Melnyk also founded Trimel and served as its President and Chief Executive
Officer from 1983 through July 1991.
MR. BRYDON has been the Chief Executive Officer since November 1997. He
joined Biovail as the Chief Executive Officer and President in January 1995 and
has been a Director since May 1995. Prior to that time and since 1990 he had
been President, Managing Director and Chairman of the Board of the Canadian
Operations of Boehringer Mannheim. In the late 1980s, Mr. Brydon served as
President and CEO of Beiersdorf Canada.
MR. POOLE joined Biovail in early 2001 and brings over 25 years of
pharmaceutical and health care industry experience to his position as President,
North American Pharmaceuticals. Mr. Poole served from 1997 to 2000 as Corporate
Vice President of Novo Nordisk Pharmaceuticals Inc., and President of North
America. Mr. Poole was President of Fisons Pharmaceuticals from 1995 until its
merger with Rhone-Poulenc Rorer in 1996. Mr. Poole had an extensive career
(1972-1994) with the American Cyanamid Co., serving in increasingly responsible
positions with The Lederle Pharmaceutical Division and was Global President of
the Davis & Geck Medical Device Division upon its merger with American Home
Products.
60
MR. CANCELLARA joined Biovail as Senior Vice President and General Counsel
in March 1996, was appointed Secretary in April 1996, and has been a Director
since May 1995 to June 2000. Prior to that time, Mr. Cancellara was a partner
with the law firm of Cassels, Brock and Blackwell since 1980 where he held many
positions including Chairman of the Executive Committee and managing partner.
MR. REININGHAUS has been a Senior Vice President and a Director since the
Amalgamation and has been President of Crystaal since November 1997. Prior to
that time, he had been the President, Chief Operating Officer and a Director of
BCI since October 1991 and Executive Vice President and a Director of Trimel
Corp. or its affiliates since November 1987. Prior to his employment by Trimel,
Mr. Reininghaus was the Marketing Manager of the Canadian operations of Miles
Pharmaceuticals, a division of Bayer AG.
MR. CROMBIE joined Biovail as Senior Vice President and Chief Financial
Officer in May 2000. Mr. Crombie came to Biovail from The Jim Pattison Group,
one of Canada's largest private holding companies where he served as Managing
Director Corporate Finance from 1998 to 2000 and was responsible for corporate
development and treasury. Prior to that time, he spent 7 years in finance and
general management positions with The Molson Companies most recently as SVP
Corporate Finance and Treasurer responsible for planning, accounting and
control, corporate development, treasury and investor relations. Mr. Crombie is
a graduate of The Harvard Graduate School of Business where he received his
Masters in Business Administration.
MR. BRISTOW has been a Director since the Amalgamation. Prior to that time,
he had been a Director of BCI since January 1993. Mr. Bristow had been a senior
investment advisor at Nesbitt Thomson Inc., a Canadian investment banking firm,
since December 1991. From September 1975 to December 1991, he served as vice
president and director of Richardson Greenshields of Canada, an investment
banking firm.
MR. ROWAN was elected to the Board of Directors in June 1997. Mr. Rowan has
been President and Chief Operating Officer of Watt Carmichael Inc., a private
investment firm, since May 1994. Prior thereto, Mr. Rowan was the Executive Vice
President and Chief Operating Officer of Watt Carmichael Inc. since 1991.
MR. VUJEA was elected to the Board of Directors in June 1997. Mr. Vujea has
been President of R & D Chemical Corporation, a chemical manufacturer and
distributor, since 1974. Prior thereto, Mr. Vujea held senior management
positions within a number of companies including American Greeting Card
Corporation, Cole National Corporation and Diverco Incorporated.
MR. HADDY was elected to the Board of Directors in June 2000. Mr. Haddy has
been the Chairman and Chief Executive Officer of London Life Bank and Trust
Corporation, a financial institution providing international banking and
segregated fund management, asset and liability management and pooled fixed
income funds since March 1997. Prior thereto, Mr. Haddy was Chairman of London
Life & Casualty Reinsurance Corporation since 1994.
61
B. COMPENSATION OF DIRECTORS AND OFFICERS
The following table sets forth the compensation information for each of the
last three fiscal years for the Chairman and the executive officers of the
Company who served as executive officers at the end of 2000 ("Named Executive
Officers"). This information includes the U.S. dollar value of base salaries,
performance bonus awards, long-term incentive compensation payments, and certain
other compensation.
SUMMARY COMPENSATION TABLE
ANNUAL
COMPENSATION LONG-TERM COMPENSATION
------------------- -----------------------------------
AWARDS PAYMENTS
---------------------- ----------
OTHER SECURITIES RESTRICTED TOTAL
ANNUAL UNDER SHARES OR ALL OTHER COMPEN-
COMPEN- OPTIONS RESTRICTED LTIP(4) COMPEN- SATION
NAME AND PRINCIPAL SALARY BONUS SATION(2) GRANTED(3) SHARE UNITS PAYOUTS SATION(2) EARNED
POSITION YEAR (U.S.$) (U.S.$) (U.S.$) (#) (U.S.$) (U.S.$) (U.S.$) (U.S.$)
------------------ -------- -------- -------- --------- ---------- ----------- ---------- --------- ----------
Eugene N. Melnyk..... 2000 502,404 125,000 -- 900,000 -- 26,500,804 -- 27,218,208
Chairman 1999 456,731 -- -- 240,000 -- -- -- 456,731
of the Board 1998 415,210 -- -- -- -- -- -- 415,210
Bruce D. Brydon(1)... 2000 275,763 241,193 -- -- -- 4,200,278 -- 4,717,234
Chief Executive 1999 259,273 -- -- -- -- 3,259,500 -- 3,518,773
Officer 1998 266,033 -- -- -- 2,473,617 -- 2,739,650
Robert A. 2000 213,413 120,317 -- 30,000 -- 747,809 -- 1,081,539
Podruzny(1)........
Senior Vice President 1999 221,728 20,759 -- 240,000 -- 1,094,900 -- 1,337,387
1998 134,700 25,754 -- -- -- -- -- 160,454
Brian H. 2000 130,812 33,345 -- 120,000 -- -- -- 164,157
Crombie(1)(5)......
Senior Vice 1999 -- -- -- -- -- -- -- --
President,
Chief Financial 1998 -- -- -- -- -- -- -- --
Officer
Kenneth C. 2000 200,079 -- -- 45,000 -- 2,799,684 -- 2,999,763
Cancellara(1)......
Senior Vice President 1999 207,870 -- -- 240,000 -- 564,263 -- 772,133
and General Counsel 1998 168,375 -- -- -- 2,957,262 -- 3,125,637
Rolf K. 2000 152,548 120,317 -- 30,000 -- 8,245,858 -- 8,518,723
Reininghaus(1).....
Senior Vice-President 1999 158,495 34,601 -- 240,000 -- -- -- 193,096
1998 118,536 -- -- -- -- 6,108,192 -- 6,226,728
---------------
Notes:
(1) The amount of compensation paid to the Named Executive Officers was
determined and paid by the Company. Other than in respect of Mr. Melnyk,
these amounts were paid in Canadian dollars and, for the purposes of this
table, converted to U.S. dollars at the respective year end rates of
exchange as follows: 2000 -- .6669; 1999 -- .6929; and 1998 -- .6735.
(2) Perquisites and other personal benefits for Named Executive Officers did not
exceed the minimum threshold disclosure level in 2000.
(3) All share and option amounts have been adjusted to give effect to the 2 for
1 stock splits completed in December 1999 and October 2000. The options are
all for the purchase of common shares of the Company and were granted under
the Company's Stock Option Plan, as amended, established in 1993. With the
exception of certain options granted in January and December 1999, all
options are for a term of 7 years and become exercisable as to a maximum of
25% on each of the first, second, third and fourth anniversaries of the date
of grant. 480,000 options were granted in January 1999 and are for a term of
5 years and become exercisable 26 months from the date of grant. A further
480,000 options were granted in December 1999 and are for a term of
]7 years and become exercisable during a period commencing 12 to 15 months
from the date of grant. Upon a change of control of Biovail Corporation, the
Company has agreed to accelerate the vesting of the 480,000 options granted
in January 1999 and to pay a cash bonus equal to the exercise price of all
such options, which must be used to purchase shares.
(4) Relates to the value of options exercised pursuant to the stock option plan.
(5) Mr. Crombie joined the company on May 1, 2000.
(6) Mr. Poole joined the company on January 15, 2001.
62
EMPLOYMENT AGREEMENTS
Eugene Melnyk, as Chairman of the Board of the Company, pursuant to a
Management Agreement, effective February 1, 1992, receives annual compensation
for services in the amount of $530,538, which amount is subject to 10% annual
increases during the term of the Management Agreement, and is reimbursed for
business related expenses. The Management Agreement will continue automatically
for renewal periods of one year unless terminated by either the Company or
Mr. Melnyk upon prior written notice.
Bruce Brydon, as Chief Executive Officer and Director, pursuant to an
Employment Agreement effective January 1, 1999, receives an annual salary of Cdn
$434,500 plus business expenses. The Employment Agreement is terminable by the
Company and/or Mr. Brydon upon 90 days' written notice.
William S. Poole, as President, North American Pharmaceuticals, pursuant to
an Employment Agreement made as of January 12, 2001 receives an annual salary of
US $400,000, subject to a cost of living adjustment, reimbursement of business
expenses. The Employment Agreement has a term of two years, expiring in
January 15, 2003 and thereafter is terminable by the Company upon six months'
written notice and is terminable by Mr. Poole upon 180 days' prior notice.
Kenneth Cancellara, as Senior Vice President, General Counsel, pursuant to
an Employment Agreement made as of January 10, 1996, receives an annual salary
of Cdn $300,000, subject to a cost of living adjustment, reimbursement of
business expenses and an automobile allowance. The Employment Agreement has a
term of five years, expiring in March, 2001 and thereafter is terminable by the
Company upon six months' written notice and is terminable by Mr. Cancellara upon
90 days' prior notice.
Rolf Reininghaus, as Senior Vice President and Director, pursuant to an
Employment Agreement made as of February 1, 1992, as amended, receives an annual
salary of Cdn $228,742, subject to a cost of living adjustment, a bonus at the
discretion of the Board of Directors as well as reimbursement of business
expenses and an automobile allowance. The Employment Agreement is terminable by
the Company upon one year's written notice and is terminable by Mr. Reininghaus
upon two months' prior written notice.
Brian Crombie, as Senior Vice President and Chief Financial Officer,
pursuant to an Employment Agreement made as of March 21, 2001 receives an annual
salary of Cdn $300,000, subject to a cost of living adjustment, reimbursement of
business expenses and an automobile allowance. The Employment Agreement has a
term of five years, expiring in May 1, 2005 and thereafter is terminable by the
Company upon six months' written notice and is terminable by Mr. Crombie upon
120 days' prior notice.
DIRECTORS' AND OFFICERS' LIABILITY INSURANCE
The Company maintains insurance for the benefit of its directors and
officers against certain liabilities incurred by them in their capacity as
directors or officers of the Company or its subsidiaries in the aggregate amount
of $25,000,000. The policy governing such insurance is subject to standard
exclusions and limitations. During the 2000 fiscal year the amount of the
premiums paid in respect of such insurance was $257,310.
REMUNERATION AND TERM OF DIRECTORS
Certain directors who are not officers or employees of the Company receive
an annual fee of $2,900 and a participation fee of $370 for each meeting of the
Board of Directors attended. All directors are reimbursed for expenses incurred
in connection with attending Board of Directors meetings. Directors also have
been granted stock options pursuant to the terms of the Company's Stock Option
Plan. During 2000, 1,085,000 options were granted to directors of the Company,
of which 1,005,000 were awarded to Named Executive Officers and 80,000 were
awarded to unrelated directors.
The directors are elected at the annual meeting of shareholders to hold
office until the next annual meeting of shareholders or until their successors
are elected.
63
COMPENSATION COMMITTEE
The Company does not have a compensation committee. The duties of such a
committee are carried out by the Board of Directors. The Board of Directors
meets on compensation matters as and when required with respect to executive
compensation.
Compensation for executive officers (including the CEO) is composed
primarily of three components; namely, base salary, performance bonuses and the
granting of stock options. Performance bonuses are considered from time to time
having regard to the below referenced objectives.
It is the responsibility of the Board of Directors to determine the level of
compensation in respect of the Company's senior executives (including the CEO)
with a view to providing such executives with a competitive compensation package
having regard to performance. Performance is defined to include achievement of
the corporate, divisional and personal objectives and enhancement of shareholder
value through increases in the stock price resulting from increases in sales
revenue, cost efficient production and enhanced annual cash flow.
In establishing the levels of base salary, the award of stock options and
performance bonuses the Board of Directors takes into consideration individual
performance, responsibilities, length of service and levels of compensation
provided by industry competitors.
PENSION PLAN
The Company does not maintain a pension plan for its employees, officers or
directors.
STOCK OPTION PLAN
The Company may grant directors and officers options to purchase common
shares of the Company under the Plan (described under "-- Stock Option Plan" in
Item 6.E below). The following tables provide information on those options
granted and exercised during 2000 and held at the end of 2000 by the Named
Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
MARKET VALUE OF
% OF TOTAL SECURITIES
OPTIONS EXERCISE UNDERLYING
SECURITIES GRANTED TO PRICE OPTIONS ON THE
UNDER OPTIONS EMPLOYEES (U.S. $/ DATE OF GRANT
NAME GRANTED #(1) IN PERIOD SECURITY) (U.S.$/SECURITY) EXPIRATION DATE
---- ------------- ---------- ---------- ---------------- -----------------
Eugene Melnyk(2)........... 600,000 26.6% 22.50 22.25 January 04, 2007
(3)........... 300,000 12.8% 36.00 35.74 December 22, 2007
Bruce Brydon............... -- -- -- -- --
Robert Podruzny(3)......... 30,000 1.3% 36.00 35.74 December 22, 2007
Kenneth Cancellara(3)...... 45,000 1.9% 36.00 35.74 December 22, 2007
Rolf Reininghaus(3)........ 30,000 1.3% 36.00 35.74 December 22, 2007
Brian H. Crombie(4)........ 30,000 1.3% 22.50 22.00 March 29, 2007
(4)......... 60,000 2.6% 27.72 27.72 June 30, 2007
(3)......... 30,000 1.3% 36.00 35.74 December 22, 2007
------------
(1) The options were granted under the Company's Stock Option Plan, as amended,
established in 1993. All options are for the purchase of Common Shares of
the Company and are for a term of 7 years.
(2) The options become exercisable as to a maximum of 25% on March 1st of 2001,
2002, 2003 and 2004 respectively.
(3) The options become exercisable as to a maximum of 25% on March 1st of 2002,
2003, 2004 and 2005 respectively.
(4) The options become exercisable as to a maximum of 25% on July 1st of 2002,
2003, 2004 and 2005 respectively.
64
AGGREGATE OPTIONS EXERCISED IN LAST FISCAL YEAR AND OPTION VALUES
SECURITIES VALUE OF UNEXERCISED
ACQUIRED AGGREGATE UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
ON VALUE FISCAL YEAR-END FISCAL YEAR-END
EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) (U.S.$) UNEXERCISABLE (#) UNEXERCISABLE(1)(2) (U.S.$)
---- ---------- ---------- ---------------------- ---------------------------
Eugene N. Melnyk................. 900,000 26,590,803 2,160,000 / 2,220,000 67,154,400 / 49,654,800
Bruce D. Brydon.................. 176,000 4,260,278 -- / -- -- / --
Robert A. Podruzny............... 43,200 747,809 55,200 / 270,000 1,729,968 / 5,506,800
Kenneth C. Cancellara............ 126,600 2,799,684 -- / 285,000 -- / 5,549,400
Rolf K. Reininghaus.............. 420,000 8,245,858 -- / 270,000 -- / 5,506,800
Brian H. Crombie................. -- -- -- / 120,000 -- / 1,242,600
------------
Notes:
(1) Value of unexercised in-the-money options calculated using the closing price
of common shares of the Company, on the New York Stock Exchange on
December 31, 2000 (U.S.$38.84), less the exercise price of in-the-money
options.
(2) All share and option amounts have been adjusted to give effect to the 2 for
1 stock splits completed in December 1999 and October 2000. The options are
all for the purchase of common shares of the Company and were granted under
the Company's Stock Option Plan, as amended, established in 1993. With the
exception of certain options granted in January and December 1999, all
options are for a term of 7 years and become exercisable as to a maximum of
25% on each of the first, second, third and fourth anniversaries of the date
of grant. 480,000 options were granted in January 1999 and are for a term of
5 years and become exercisable 26 months from the date of grant. A further
480,000 options were granted in December 1999 and are for a term of 7 years
and become exercisable during a period commencing 12 to 15 months from the
date of grant. Upon a change of control of Biovail Corporation, the Company
has agreed to accelerate the vesting of the 480,000 options granted in
January 1999 and to pay a cash bonus equal to the exercise price of all such
options, which must be used to purchase shares.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan ("EPP") was established in 1997
and approved by the shareholders at the Special Meeting held on January 1, 1996.
The purpose of the EPP is to provide a convenient method for full-time employees
of the Company to participate in the share ownership of the Company or to
increase their share ownership in the Company via payroll or contractual
deduction. Directors, senior officers or insiders of the Company are not
eligible to participate in the EPP. The aggregate number of shares reserved for
issuance under the EPP taking into consideration the 2 for 1 stock splits
completed in December, 1999 and October, 2000 shall not exceed 1,200,000 common
shares. At the discretion of a committee of the Board of Directors that will
administer the EPP, the Company may issue shares directly from treasury or
purchase shares in the market from time to time to satisfy the obligation under
the EPP. A participant may authorize a payroll or contractual deduction up to a
maximum of 10% of the base salary or remuneration to be received during any
purchase period. The purchase price shall be 90% of the fair value per share of
stock on the date on which the eligible period ends.
As of March 31, 2000 the Company had issued 30,416 shares pursuant to the
EPP, of which 5,090 were issued in 2000 and 2,130 in 2001.
C. BOARD PRACTICES
Information regarding the Company's Board of Directors is provided in
Item 6.B. "Compensation of Directors and Officers" above and Item 10.B.
"Memorandum and Articles of Association" below.
D. EMPLOYEES
At December 31, 2000, we had 1,200 employees, including 350 in part-time
positions, of whom 454 were engaged in sales and marketing, 351 were engaged in
research and development, 321 were engaged in manufacturing, and the remaining
74 worked in general and administrative areas. At December 31, 1999 and 1998, we
had 701 and 465 employees, respectively, of whom 146 and 117, respectively, were
in part-time positions. None of our employees are represented by a collective
bargaining agreement.
65
E. SHARE OWNERSHIP
The following table shows the number and percent of Common Shares
beneficially owned by Eugene Melnyk and the officers and directors as a group (7
persons). Other than Mr. Melnyk, no executive officer or director of the Company
beneficially owns 1% or more of the Company's Common Shares.
NAME OF BENEFICIAL OWNER COMMON SHARES OWNED PERCENT(1)
------------------------ ------------------- ----------
Eugene Melnyk(2)............................................ 24,912,496 18.8%
Officers and directors as a group (8 persons)............... 25,894,652 19.6%
------------
(1) Does not include 9,348,104 common shares issuable upon exercise of stock
options outstanding under our stock option plan, and 14,349,000 common
shares issuable upon exercise of outstanding warrants.
(2) Mr. Melnyk also has options to purchase 4,380,000 common shares, of which
2,160,000 are exerciseable.
STOCK OPTION PLAN
Under the Company's Stock Option Plan, as amended, (the "Plan") established
in 1993 and approved by the Shareholders at the Special Meeting held on
March 28, 1994, the Company may grant to directors, officers, employees,
consultants and advisors, options to purchase common shares of the Company. The
purpose of the Plan is to provide incentives to certain of the Company's
directors, officers, employees, consultants and advisors. The aggregate number
of shares reserved for issuance under the Plan, taking into consideration the 2
for 1 stock splits completed in December 1999 and October 2000, shall not exceed
28,000,000 common shares. The number of shares reserved for issuance to any one
person under the Plan together with shares which that person may acquire under
any similar plan of the Company may not exceed 5% of the total issued and
outstanding common shares. Under the Plan, the Company designates the maximum
number of shares that are subject to an option. The exercise price per share of
an option is the closing market price at which the shares are traded on the
New York Stock Exchange on the day prior to the date the option is granted, or
if not so traded, the average between the closing bid and ask prices thereof as
reported for that day.
As at March 31, 2001, the Company has granted an aggregate of 9,414,780
options which are outstanding at exercise prices ranging from $2.96 to $40.00
per share. The options are exercisable on various dates up to January 15, 2008.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
As far as known to the Company, Biovail is not directly or indirectly owned
or controlled by another corporation(s) or by any foreign government.
Other than as provided in Item 6.E "Share Ownership" above, we are not aware
of any shareholders owning more than 5% of our outstanding voting securities as
of May 18, 2001.
The following table indicates as of March 31, 2000, the approximate total
number of holders of record of Common Shares, the total number of Common Shares
outstanding, the number of holders of record of Common Shares with United States
addresses, the portion of the outstanding Common Shares held in the United
States, and the percentage of Common Shares held in the United States:
NUMBER OF PERCENTAGE OF
TOTAL NUMBER COMMON SHARES COMMON SHARES
OF COMMON NUMBER OF HELD BY HELD BY
SHARES U.S. HOLDERS U.S. HOLDERS OF U.S. HOLDERS OF
TOTAL NUMBER OF HOLDERS OF RECORD(1) OUTSTANDING OF RECORD(2) RECORD RECORD
------------------------------------ ------------ ------------ ---------------- ----------------
813........................................ 132,142,211 233 111,227,105 84.2%
------------
(1) A substantial number of the Common Shares are held by depositories,
brokerage firms and financial institutions in "street name". Based upon the
number of annual reports and proxy statements requested by such nominees,
the Company estimates that the total number of beneficial holders of Common
Shares exceeds 14,700 holders.
66
(2) The computation of the number of Common Shares held in the United States is
based upon the number of holders of record with United States' addresses.
United States residents may beneficially own Common Shares owned of record
by non-United States residents.
B. RELATED PARTY TRANSACTIONS
INDEBTEDNESS OF EXECUTIVE OFFICERS
None of the directors, executive officers or senior officers was indebted to
the Company during the most recently completed financial year.
In March 2001, the Company authorized the making of a U.S.$600,000 loan to
William S. Poole, an executive officer of the Company; the loan is secured by a
mortgage/charge on the personal residence and the loan shall not bear interest
until the first day of March 2004. Thereafter, the loan will bear interest equal
to the Company's rate for borrowing. The loan is due on the earlier of
termination of employment or March 31, 2008.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
The financial statements filed as part of this annual report are filed under
Item 18.
LITIGATION
From time to time, Biovail 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.
In this regard, Biovail Corporation and its wholly owned subsidiary, Biovail
Laboratories, Inc. (for purposes of this Item 8.A. "Litigation", "Biovail"),
have been sued in separate lawsuits by Bayer AG and Bayer Corporation, 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.
On April 23, 1998, Biovail filed a four-count complaint against Bayer AG,
Bayer Corporation 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 Corporation 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 Corporation and Biovail Laboratories, Inc.
(together "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's motion for Injunctive Relief was denied.
Biovail will contest ANDRX's allegations aggressively, and will raise
defenses and counter-claims.
Biovail has recently commenced a patent infringement suit against ANDRX with
respect to Biovail's recently listed patent covering
Tiazac-Registered Trademark-.
67
Since these actions are at their initial stages, it is not possible to
provide any reasonable forecast at this time.
In February, 2001, Biovail Laboratories, Inc. commenced an action against
Mylan Pharmaceuticals, Inc. ("Mylan") and Pfizer Inc. 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 Pharmaceuticals, Inc. brought an action
against the FDA alleging that the FDA had improperly granted to Biovail
Laboratories, Inc. approval of its generic version of Pfizer Inc.'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. Mylan has appealed. Biovail believes
that Mylan's action is without merit and that the FDA acted properly in
approving Biovail's product. Nevertheless, this action is in the early stages
and it is not possible to be more definitive at this time with respect to the
likely result of the suit.
In November 1999, Biovail acquired Fuisz Technologies Ltd. ("Fuisz"). Fuisz
is now a wholly-owned subsidiary of Biovail and has been renamed Biovail
Technologies Ltd. ("Biovail Technologies").
In February 2000 Biovail Technologies filed a complaint in Circuit Court of
Fairfax County, Va. against Richard C. Fuisz, former chairman of Fuisz
Technologies Ltd., and several other former Fuisz executives, directors and
employees and related parties (the "Complaint"). The Complaint charges breaches
of fiduciary duties, breaches of contract, fraud, conversion, business
conspiracy and unjust enrichment arising out of a pattern of misconduct in which
the defendants pursued their personal advancement at the expense of Fuisz.
Biovail believes that the allegations against the defendants are meritorious and
is in the process of vigorously litigating the suit.
In response to Biovail's suit, Richard Fuisz has brought certain legal
actions intended to compel Biovail to pay him certain consulting fees which
Biovail claims are not due because of Fuisz's breach of a Consulting Agreement
pursuant to which such fess are established. Though it is currently premature to
predict the outcome of this action, Biovail believes that the Delaware action is
without merit and has been vigorously defending the lawsuit.
Biovail entered into a settlement with Hoechst Aktiengesselschaft and
related parties with respect to an action commenced by Biovail in March 1998
with respect to damages to Biovail resulting from an agreement between Hoechst
and Andrx Pharmaceuticals that had the effect of blocking the marketing of
Biovail's generic version of Cardizem CD.
In December 2000, the Company completed a settlement of the legal action it
had brought against Hoechst AG and related parties ("Aventis"). As a result of
this settlement, the Company received the sum of $19,500,000 as a reimbursement
for expenses directly incurred in pursuing the litigation, and other expenses
reasonably related to the litigation, during 2000. The reimbursement has been
recorded as a reduction to costs of $3,700,000 included in cost of goods sold,
and to costs of $15,800,000 included in selling, general and administrative
expenses. The Company did not receive any reimbursement for costs related to the
litigation incurred prior to 2000.
For additional discussion of our legal proceedings, see note 21 to our
consolidated financial statements included elsewhere in this annual report.
B. SIGNIFICANT CHANGES
Except as otherwise disclosed in this annual report, there has been no
material adverse change in the financial position of the Company since the date
of the audited consolidated financial statements.
68
ITEM 9. THE OFFER AND LISTING
A. NATURE OF TRADING MARKET
Our common shares are traded on the New York Stock Exchange ("NYSE") and on
the Toronto Stock Exchange ("TSE") under the symbol "BVF". The last reported
sales price of our common shares on May 11, 2001 on the NYSE was $38.97 and on
the TSE was Cdn$60.45. The following table sets forth the high and low per share
sales prices for our common shares on the NYSE and TSE for the periods
indicated.
COMMON SHARES
-----------------------------------------
NYSE TSE
------------------- -------------------
HIGH LOW HIGH LOW
$ $ CDN$ CDN$
-------- -------- -------- --------
1996........................................................ 9.47 5.00 13.63 7.06
1997........................................................ 9.92 5.09 14.11 7.11
1998........................................................ 12.38 5.11 17.55 8.00
1999
Quarter 1................................................... 10.83 8.64 16.50 12.77
Quarter 2................................................... 12.78 8.09 18.63 11.97
Quarter 3................................................... 14.75 11.95 22.13 17.43
Quarter 4................................................... 23.44 12.72 33.95 18.68
2000
Quarter 1................................................... 35.75 19.13 52.00 27.50
Quarter 2................................................... 28.44 19.56 42.18 28.28
Quarter 3................................................... 42.75 27.69 64.75 40.70
Quarter 4................................................... 45.38 31.78 69.50 48.50
December.................................................... 41.80 31.78 63.43 48.50
2001
January..................................................... 44.65 33.00 67.05 49.40
February.................................................... 47.70 41.56 73.00 62.65
March....................................................... 46.40 29.03 71.55 46.50
April....................................................... 40.45 29.10 63.36 45.80
May (through to May 11, 2000)............................... 40.00 36.90 62.44 57.02
Our warrants entitle the holder to purchase four of our common shares at a
per share price of $10.00 from October 1, 1999 until September 30, 2002. Our
warrants have traded on the NYSE since September 30, 1999 under the symbol
"BVF_w". Our Convertible Subordinated Preferred Equivalent Debentures
("Debentures") are convertible at any time into our common shares at $30.337 per
share. Our Debentures have traded on the NYSE since March 18, 2000 under the
symbol "BVF_p". The last reported sales prices of our warrants and
69
Debentures on May 11, 2001 on the NYSE were $117.50 and $71.75, respectively.
The following table sets forth the high and low per share sales prices for our
warrants and Debentures on the NYSE for the periods indicated.
WARRANTS(1) DEBENTURES(2)
------------------- -------------------
HIGH LOW HIGH LOW
$ $ $ $
-------- -------- -------- --------
1999
Quarter 4................................................... 57.38 23.00 n/a n/a
2000
Quarter 1................................................... 101.13 43.00 50.00 42.25
Quarter 2................................................... 76.00 45.25 56.81 39.25
Quarter 3................................................... 132.00 76.25 77.13 53.44
Quarter 4................................................... 143.50 94.00 82.38 62.80
December.................................................... 125.04 97.00 75.88 62.80
2001
January..................................................... 140.00 100.05 80.25 64.00
February.................................................... 150.50 133.24 85.19 77.66
March....................................................... 145.05 80.00 83.23 58.00
April....................................................... 122.20 80.25 73.56 56.50
May (through to May 11, 2001)............................... 121.00 110.00 73.00 69.70
---------------
(1) The warrants began to trade on the NYSE on September 30, 1999.
(2) The Debentures began to trade on the NYSE on March 18, 2000.
MARKET PRICE VOLATILITY OF COMMON SHARES
Market prices for the securities of pharmaceutical and biotechnology
companies, including Biovail, have historically been highly volatile, and the
market has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. Factors such as: fluctuations in the Company's operating results, the
aftermath of public announcements by the Company, concern as to safety of drugs,
and general market conditions, can have an adverse effect on the market price of
the Company's Common Shares and other securities.
B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
The Company's Common Shares, no par value (the "Common Shares") are traded
on the NYSE and the TSE under the symbol "BVF".
The Company's Warrants, each warrant entitling the holder to purchase one
Common Share are traded on the NYSE under the symbol "BVF_w".
The Company's 6.75% Convertible Subordinated Preferred Equivalent Debentures
due March 31, 2025 are traded on the NYSE under the symbol "BVF_p".
D. SELLING SHAREHOLDERS
Not applicable.
E. DILUTION
Not applicable.
70
F. EXPENSES OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
ARTICLES OF AMALGAMATION
The Company is governed by its articles of amalgamation (the "Articles")
under the BUSINESS CORPORATIONS ACT (Ontario) (the "OBCA") and by its by-laws
(the "By-laws"). The Company's Ontario corporation number is 1402077. The
Company's articles provide that there are no restrictions on the business the
Company may carry on or on the powers the Company may exercise. Companies
incorporated under the OBCA are not required to include specific objects or
purposes in their articles or by-laws.
DIRECTORS
Subject to certain exceptions, including in respect of their own
compensation, directors may not vote on matters in which they have a material
interest. The directors are entitled to remuneration as shall from time to time
be determined by the Board. The directors may exercise all the powers of the
Company to borrow money. These powers may be amended by resolution of the
shareholders. Directors are not required to retire at a particular age. There is
no requirement for the directors to hold shares.
RIGHTS, PREFERENCES AND DIVIDENDS ATTACHING TO SHARES
Any dividend unclaimed after a period of six years from the date on which
such dividend is declared to be payable shall be forfeited and shall revert to
the Corporation. Each of the holders of the Company's common shares, as of the
record date prior to a meeting, is entitled to attend and to cast one vote for
each common share held at such annual and/or special meeting, including with
respect to the re-election of directors. Subject to the provisions of the
By-laws, all directors may, if still qualified to serve as directors of the
Company, stand for re-election. The Company's Board of Directors is not replaced
at staggered intervals.
The holders of the Company's common shares have the right to receive
dividends in the Corporation if and when declared. On a distribution of assets
of the Company on a winding-up, dissolution or other return of capital (subject
to certain exceptions) the holders of the Company's common shares the Company's
shareholders shall have a right to receive their PRO RATA share of such
distribution. The Company's shareholders have no liability to further capital
calls as all shares issued and outstanding are fully paid and non-assessable.
There are no sinking fund or redemption provisions in respect of the Company's
common shares.
The Company is permitted under its Articles to issue Class A Shares on such
terms and in such manner as the directors may determine. As of the date hereof,
no Class A shares are issued and outstanding.
ACTION NECESSARY TO CHANGE THE RIGHTS OF SHAREHOLDERS
The rights attaching to the different classes of shares may be varied by
special resolution passed at a meeting of that class's shareholders.
LIMITATIONS ON THE RIGHTS TO OWN SHARES
The Articles do not contain any limitations on the rights to own shares.
ANNUAL AND SPECIAL MEETINGS OF SHAREHOLDERS
The Company is required to mail a notice of meeting and management
information circular to registered shareholders not less than 21 days prior to
the date of the meeting. Such materials must be filed concurrently
71
with the applicable securities regulatory authorities. Subject to certain
provisions of the By-laws, a quorum of two shareholders in person or represented
by proxy holding or representing by proxy not less than a prescribed percentage
of the total number of issued and outstanding shares of the Company is required.
Shareholders and their duly appointed proxies and corporate representatives are
entitled to be admitted to annual and/or special meetings of the Company.
OTHER PROVISIONS OF ARTICLES AND BY-LAWS
There are no provisions in the Articles or By-laws:
- delaying or prohibiting a change in control of the Company that operate
only with respect to a merger, acquisition or corporate restructuring;
- discriminating against any existing or prospective holder of shares as a
result of such shareholder owning a substantial number of shares;
- requiring disclosure of share ownership; and
- governing changes in capital, where such provisions are more stringent
than those required by law.
C. MATERIAL CONTRACTS
Not applicable.
D. EXCHANGE CONTROLS
There are currently no limitations imposed by Canadian federal or provincial
laws on the rights of non-resident or foreign owners of Canadian securities to
hold or vote the securities held. There are also no such limitations imposed by
the Company's articles and bylaws with respect to the Common Shares of the
Company.
INVESTMENT CANADA ACT
Under the Investment Canada Act, the acquisition of control of a Canadian
business by a "non-Canadian" is subject to review by the Investment Review
Division of Industry Canada ("Investment Canada"), a government agency, and will
not be allowed unless the investment is found likely to be of "net benefit" to
Canada. An acquisition of control will be reviewable by Investment Canada if the
value of the assets of the Canadian business for which control is being acquired
is (i) Cdn$5 million or more in the case of a "direct" acquisition;
(ii) Cdn$50 million or more in the case of an "indirect" acquisition; or
(iii) between Cdn$5 million or more but less than Cdn$50 million where the
Canadian assets acquired constitute more than 50% of the asset value of all
entities acquired, or if the acquisition is not effected through the acquisition
of control of a foreign corporation.
These thresholds have been increased for the purposes of acquisition of
control of a Canadian business by investors from members of the World Trade
Organization ("WTO"), including Americans, or WTO member-controlled companies. A
direct acquisition by a WTO investor is reviewable only if it involves the
direct acquisition of a Canadian business with assets of Cdn$209 million or more
for the year 2001 (this figure is adjusted annually to reflect inflation).
Indirect acquisitions by WTO investors are not reviewable, regardless of the
size of the Canadian business acquired, unless the Canadian assets acquired
constitute more than 50% of the value of all entities acquired, in which case
the Cdn$209 million threshold applies.
These increased thresholds applicable to WTO investors do not apply to the
acquisition of control of a Canadian business that is engaged in certain
sensitive areas such as uranium production, financial services, transportation
or culture. In the case of the acquisition of control of a cultural business,
the Heritage Minister can elect to review the transaction even where it does not
exceed the lower asset threshold test above. Even if the transaction is not
reviewable, a non-Canadian must still give notice to Investment Canada of the
acquisition of control of a Canadian business within 30 days after its
implementation.
72
COMPETITION ACT
Under the Competition Act (Canada) (the "Competition Act"), certain
transactions are subject to the pre-notification requirements of the Act whereby
notification of the transaction and specific information in connection therewith
must be provided to the Commissioner of Competition (the "Commissioner"). A
transaction may not be completed until the applicable statutory waiting periods
have expired, namely 14 days or 42 days for a short-form or long-form filing,
respectively. As well, where the parties elect to file a short-form
notification, the Commissioner may "bump" the filing to a long-form, thereby
restarting the clock once the parties submit their filing.
A proposed transaction is subject to pre-notification only if the parties to
the transaction together with their affiliates have total assets in Canada or
total revenues from sales in, from or into Canada that exceed Cdn$400 million in
aggregate value. Having met this first threshold, the parties must then provide
pre-notification if any one of the following additional thresholds is met:
1) for an acquisition of assets in Canada where the aggregate value of the
assets in Canada or the gross revenues from sales in or from Canada that are
being acquired exceeds Cdn$35 million; 2) in the case of an acquisition of
shares of a company in Canada, where as a result of the proposed acquisition,
the person acquiring the shares, together with its affiliates, would own more
than 20% (or, if the person making the acquisition already owns more than 20% or
more of the voting shares of the target, then more than 50%) of the voting
shares of a corporation that are publicly traded, or in the case of a company of
which the shares are not publicly traded, the threshold is more than 35% of the
voting shares (and more than 50% if the acquiror owns 35% or more of the voting
shares of the subject company prior to making the acquisition) and assets in
Canada or the revenues in or from Canada of the Corporation the shares of which
are acquired exceed Cdn$35 million; or 3) in the case of a proposed amalgamation
of two or more corporations where one or more of the amalgamating corporations
carries on an operating business (either directly or indirectly) where the
aggregate value of the assets in Canada that would be owned by the continuing
corporation resulting from the amalgamation would exceed Cdn$70 million or the
gross revenues from sales in or from Canada generated from the assets of the
amalgamated entity would exceed Cdn$70 million.
Finally, all merger transactions, regardless of whether they are subject to
pre-merger notification, are subject to the substantive provisions of the
Competition Act namely, whether the proposed merger prevents or lessens, or is
likely to prevent or lessen, competition substantially in a relevant market.
E. TAXATION
CANADIAN FEDERAL INCOME TAXATION
The following discussion is a summary of the principal Canadian federal
income tax considerations generally applicable to a holder of the Company's
Common Shares who, for the purposes of the Canadian Tax Act (as defined below),
is or was neither resident nor deemed to be resident in Canada at any time while
holding such Common Shares, deals at arm's length with the Company, holds such
Common Shares as capital property, does not use or hold and is not deemed or
otherwise considered to use or hold such Common Shares in carrying on a business
in Canada and whose Common Shares do not otherwise constitute "taxable Canadian
property" (a "Non-Resident Shareholder"). Common Shares of a non-resident of
Canada will generally not constitute "taxable Canadian property" unless either
(a) at any time during the period of 60 months immediately preceding the
disposition of such Common Shares by such non-resident, 25% or more of the
issued shares of any class or series of the capital stock of the Company (and,
in the view of the Canada Customs and Revenue Agency, taking into account any
rights to acquire shares) were owned by the non-resident, by persons with whom
the non-resident did not deal at arm's length, or any combination thereof, or
(b) the non-resident's Common Shares are otherwise deemed to be "taxable
Canadian property".
This summary is based upon the current provisions of the INCOME TAX ACT
(Canada) (the "Canadian Tax Act"), the regulations thereunder, the CANADA-UNITED
STATES INCOME TAX CONVENTION, 1980, and the Company's understanding of the
current administrative and assessing policies and practices published by the
Canada Customs and Revenue Agency. This summary also takes into account all
specific proposals to amend the Canadian Tax Act and the regulations thereunder
publicly announced by the Minister of Finance (Canada) prior to the date hereof.
This summary does not otherwise take into account or anticipate changes in the
law, whether
73
by way of judicial, governmental or legislative decision or action, nor does it
take into account provincial, territorial or foreign tax legislation or
considerations.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, NOR
SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE GENERALLY OR TO ANY PARTICULAR
HOLDER. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THEIR
PARTICULAR TAX POSITIONS. A HOLDER THAT IS, AS DEFINED UNDER THE CANADIAN
TAX ACT, A "SPECIFIED FINANCIAL INSTITUTION", OR IS OTHERWISE A "FINANCIAL
INSTITUTION" SUBJECT TO SPECIAL PROVISIONS OF THE CANADIAN TAX ACT APPLICABLE TO
"MARK-TO-MARKET PROPERTY", OR A HOLDER THAT IS AN INSURER THAT CARRIES ON AN
INSURANCE BUSINESS IN CANADA AND ELSEWHERE, SHOULD CONSULT ITS OWN TAX ADVISORS
AS THE FOLLOWING SUMMARY DOES NOT APPLY TO SUCH A HOLDER.
GAINS ON DISPOSITION OF COMMON SHARES
No tax will generally be payable under the Canadian Tax Act on any capital
gain realized by a Non-Resident Shareholder on the disposition of such
Non-Resident Shareholder's Common Shares.
DIVIDENDS ON COMMON SHARES
Subject to the provisions of an applicable income tax treaty, dividends
(including deemed dividends, which could arise upon, among other circumstances,
the disposition of Common Shares to the Company) paid or credited by the Company
on the Common Shares to a Non-Resident Shareholder will generally be subject to
non-resident withholding tax under the Canadian Tax Act, at a rate of 25% of the
amounts paid or credited. Under the provisions of the CANADA-UNITED STATES
INCOME TAX CONVENTION, 1980, as amended (the "Convention"), the rate of
withholding tax on dividends paid by the Company to a Non-Resident Shareholder
that is a resident of the United States for the purposes of the Convention and
is the beneficial owner of such dividends is generally reduced to (a) 5% if the
Non-Resident Shareholder is a company which owns at least 10% of the Company's
voting stock or (b) 15% in all other cases.
U.S. FEDERAL INCOME TAXATION
The following discussion is a summary of certain material U.S. federal
income tax consequences of the ownership and disposition of common shares to
U.S. Holders (as defined below) who hold common shares as capital assets. This
discussion is based upon laws, regulations, rulings and decisions currently in
effect, all of which are subject to change, retroactively or prospectively.
The discussion is for general information only and may not apply to certain
categories of shareholders subject to special treatment under the Internal
Revenue Code of 1986, as amended (the "CODE"), such as Non-U.S. Holders (as
defined below), holders that are passthrough entities or investors in
passthrough entities, dealers or traders in securities or currencies, banks,
insurance companies, traders who elect to mark-to-market their securities,
persons whose "functional currency" is not the U.S. dollar, tax-exempt entities,
and persons that hold common shares as a position in a straddle or as part of a
"hedging," "integrated, "constructive sale" or "conversion" transaction.
Moreover, the discussion summarizes only federal income tax consequences and
does not address any other U.S. federal tax consequences or any state, local or
other tax consequences. ACCORDINGLY, PROSPECTIVE INVESTORS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE
OWNERSHIP AND DISPOSITION OF COMMON SHARES TO THEM, INCLUDING ANY U.S. FEDERAL,
STATE, LOCAL OR OTHER TAX CONSEQUENCES (INCLUDING ANY TAX RETURN FILING OR OTHER
TAX REPORTING REQUIREMENTS) OF THE OWNERSHIP AND DISPOSITION OF COMMON SHARES.
For purposes of the following discussion, the term "U.S. Holder" means a
beneficial owner of common shares that is, for U.S. federal income tax purposes,
a U.S. citizen or resident, a corporation created or organized in or under the
laws of the United States or any political subdivision thereof, an estate the
income of which is includable in gross income for U.S. income tax purposes
regardless of its source, or a trust if (a) a U.S. court is able to exercise
primary supervision over the administration of the trust and one or more United
States fiduciaries have the authority to control all substantial decisions of
the trust, or (b) the trust has a valid election in effect under applicable
U.S. Treasury Regulations to be treated as a United States person. A
74
"Non-U.S. Holder" means a beneficial owner of common shares that is, for
U.S. federal income tax purposes, a nonresident alien or a corporation, estate
or trust that is not a U.S. Holder.
TAXATION OF DIVIDENDS
Subject to the following discussion of special rules applicable to "PFICs,"
U.S. Holders generally will treat the gross amount of any dividends, if any,
paid by the Company, without reduction for Canadian withholding taxes, as
ordinary taxable income for U.S. federal income tax purposes. In certain
circumstances, however, U.S. Holders may be eligible to receive a foreign tax
credit for the Canadian withholding taxes and, in the case of a corporate
U.S. Holder, owning 10% or more of the voting shares of the Company, for a
portion of the Canadian taxes paid by the Company itself. Dividends paid by the
Company, if any, will not qualify for the dividends received deduction otherwise
available to corporate U.S. Holders.
The amount of any dividend paid in Canadian dollars will equal the
U.S. dollar value of the Canadian dollars received calculated by reference to
the exchange rate in effect on the date the dividend is distributed regardless
of whether the Canadian dollars are converted into U.S. dollars. If the Canadian
dollars received as a dividend are not converted into U.S. dollars on the date
of receipt, a U.S. Holder will have a basis in the Canadian dollars equal to its
U.S. dollar value on the date of receipt. Any gain or loss realized on a
subsequent conversion or other disposition of the Canadian dollars will be
treated as ordinary income or loss.
It is possible that the Company is, or at some future time will be, at least
50% owned by United States persons. Dividends paid by a foreign corporation that
is at least 50% owned by United States persons may be treated as United States
source income (rather than foreign source income) for foreign tax credit
purposes to the extent the foreign corporation has more than an insignificant
amount of United States source income. The effect of this rule may be to treat a
portion of any dividends paid by the Company as United States source income. The
Code permits a U.S. Holder entitled to benefits under the Canada-U.S. Income Tax
Treaty to elect to treat any Company dividends as foreign source income for
foreign tax credit limitation purposes if the dividend income is separated from
other income items for purposes of calculating the U.S. Holder's foreign tax
credit. U.S. Holders should consult their own tax advisors about the
desirability of making, and the method of making, such an election.
SALE, EXCHANGE OR OTHER DISPOSITION
Subject to the following discussion of special rules applicable to "PFICs,"
U.S. Holders will generally recognize capital gain or loss on the sale, exchange
or other disposition of common shares. Such gain or loss will be long-term
capital gain or loss if the common shares have been held for more than one year.
Any gain or loss recognized by a U.S. Holder will generally be treated as United
States source gain or loss. The deduction of capital losses is subject to
limitations.
PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS
A "passive foreign investment company" (a "PFIC") is any foreign corporation
if, after the application of certain "look-through" rules, (i) at least 75% of
its gross income is "passive income" or (ii) at least 50% of the average value
of its assets is attributable to assets that produce passive income or are held
for the production of passive income. The determination as to PFIC status is
made annually. If a U.S. Holder is treated as owning PFIC stock, the
U.S. Holder will be subject to special rules generally intended to eliminate the
benefit of the deferral of U.S. federal income tax that results from investing
in a foreign corporation that does not distribute all its earnings currently.
These rules may adversely affect the tax treatment to a U.S. Holder of dividends
paid by the Company and of sales, exchanges and other dispositions of the
Company common shares, and may result in other adverse U.S. federal income tax
consequences.
The Company believes that it is not currently a PFIC and does not expect to
become a PFIC in the future. However, there can be no assurance that the
Internal Revenue Service will not successfully challenge the Company's position
or that the Company will not become a PFIC at some future time as a result of
changes in its assets, income or business operations.
75
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to dividends in
respect of the common shares and the proceeds received on the disposition of
common shares paid within the United States (and in certain cases, outside the
United States) to U.S. Holders other than certain exempt recipients (such as
corporations), and 31% backup withholding may apply to such amounts if the
U.S. Holder fails to provide an accurate taxpayer identification number or is
otherwise subject to backup withholding. The amount of any backup withholding
from a payment to a U.S. Holder will be allowed as a credit against the
U.S. Holder's U.S. federal income tax liability.
F. DIVIDENDS AND PAYING AGENTS
The Company has not paid cash dividends on its Common Shares, and at this
time it intends to continue this policy for the foreseeable future in order to
retain earnings for the development and growth of the Company's business. The
Company's dividend policy will be reviewed periodically depending on the
Company's financial position, capital requirements, general business conditions
and on other factors.
G. STATEMENTS BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and file reports and other information with the SEC.
You may read and copy any of our reports and other information at, and obtain
copies upon payment of prescribed fees from, the Public Reference Room
maintained by the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549 and at certain of the SEC's regional offices at 7 World Trade Center,
Suite 1300, New York, NY 10048 and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, IL 60661. In addition, the SEC maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC at
http://www.sec.gov. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330.
We are required to file reports and other information with the securities
commissions in all provinces of Canada. You are invited to read and copy any
reports, statements or other information, other than confidential filings, that
we file with the provincial securities commissions. These filings are also
electronically available from the Canadian System for Electronics Document
Analysis and Retrieval (SEDAR) (http://www.sedar.com), the Canadian equivalent
of the SEC's electronic document gathering and retrieval system.
We "incorporate by reference" information that we file with the SEC, which
means that we can disclose important information to you by referring you to
those documents. The information incorporated by reference is an important part
of this Annual Report on Form 20-F and more recent information automatically
updates and supersedes more dated information contained or incorporated by
reference in this Annual Report on Form 20-F.
As a foreign private issuer, we are exempt from the rules under the
Securities Exchange Act of 1934, as amended, prescribing the furnishing and
content of proxy statements to shareholder. We have included in this report
certain information disclosed in our Proxy Statement prepared under Canadian
securities rules.
We will provide without charge to each person, including any beneficial
owner, to whom a copy of this prospectus has been delivered, on the written or
oral request of such person, a copy of any or all documents referred to above
which have been or may be incorporated by reference in this prospectus (not
including exhibits to such incorporated information that are not specifically
incorporated by reference into such information). Requests for such copies
should be directed to us at the following address: Biovail Corporation, 2488
Dunwin Drive, Mississauga, Ontario, Canada, L5L 1J9, Attention: Investor
Relations, telephone number (416) 285-6000.
76
I. SUBSIDIARY INFORMATION
At December 31, 2000, Biovail had the following principal subsidiaries
GROUP REGISTERED OFFICE & COUNTRY OF
COMPANY NATURE OF BUSINESS SHARE % INCORPORATION AND OPERATION
------- --------------------------- -------- -------------------------------
Biovail Americas Corp............ Holding company 100 808 Aviation Parkway,
Morrisville, NC, USA
Biovail Laboratories Manufacture, development, 100 Chelston Park, Bldg 2,
Incorporated................... licensing of pharmaceutical Collymore Rock, St. Michael,
products Barbados
Trimel Holdings Limited.......... Holding company 100 Chelston Park, Bldg 2,
Collymore Rock, St. Michael,
Barbados
Biovail Technologies Ltd......... Manufacture and development 100 3701 Concorde Parkway,
of pharmaceutical products Chantilly, VA, USA
Biovail Pharmaceuticals, Inc..... Sales and distribution of 100 808 Aviation Parkway,
pharmaceutical products Morrisville, NC, USA
Nutravail Technologies Inc....... Manufacture, development, 100 22960 Shaw Road, Sterling, VA,
sales and distribution of USA
neutraceutical products
Biovail International
Holdings Ltd..................... Holding company 100 #70 Heather Road, Sandyford,
Dublin, Ireland
Biovail Technologies Development of 100 #70 Heather Road, Sandyford,
(Ireland) Ltd.................... pharmaceutical products Dublin, Ireland
IPL Acquireco 2000 Ltd........... Holding company 100 Romasco Place, Wickhams Cay,
Road Town, Tortola, BVI
Intelligent Polymers Limited..... Development of 100 Clarendon House, 2 Church
pharmaceutical products Street, Hamilton, Bermuda
Biovail SA....................... Development and licensing 100 Baarerstrasse 112, 6300 Zug,
of pharmaceutical products Switzerland
ITEM 11. QUANTITIATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosures about
market risk is detailed in Item 5.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATION TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
On December 31, 1999 we filed Articles of Amendment to effect a subdivision
of our common shares on the basis of two common shares for every one common
share held and an increase in our authorized capital from 120,000,000 common
shares to an unlimited number of common shares. An amendment was also made to
our
77
current by-law to change the quorum requirements for shareholders meetings from
two shareholders holding 51% of the outstanding shares to two shareholders
holding 25% of the outstanding shares.
On October 10, 2000, we filed Articles of Amendment to effect a subdivision
of our common shares on the basis of two common shares for every one common
shares.
ITEM 15. RESERVED
ITEM 16. RESERVED
PART III
ITEM 17. FINANCIAL STATEMENTS
The Company has elected to provide financial statements pursuant to
Item 18.
ITEM 18. FINANCIAL STATEMENTS
78
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
BIOVAIL CORPORATION -- Financial Statement completed in
accordance with Canadian GAAP
Auditors' Report -- Ernst & Young LLP................... F-2
Auditors' Report -- Deloitte & Touche LLP............... F-3
Consolidated Balance Sheets as at December 31, 2000 and
1999................................................... F-4
Consolidated Statements of Income for the years ended
December 31, 2000, 1999 and 1998....................... F-5
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2000, 1999 and 1998........... F-6
Consolidated Statements of Cash Flows for the years
ended December 31, 2000, 1999 and 1998................. F-7
Notes to the Consolidated Financial Statements.......... F-8
BIOVAIL CORPORATION -- Financial Statement completed in
accordance with U.S. GAAP
Auditors' Report........................................ F-47
Consolidated Balance Sheets as at December 31, 2000 and
1999................................................... F-48
Consolidated Statements of Loss for the years ended
December 31, 2000 and 1999............................. F-49
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2000 and 1999................. F-50
Consolidated Statements of Cash Flows for the years
ended December 31, 2000 and 1999....................... F-52
Notes to the Consolidated Financial Statements.......... F-53
F-1
AUDITORS' REPORT
To the Board of Directors of Biovail Corporation
We have audited the consolidated balance sheets of BIOVAIL CORPORATION as at
December 31, 2000 and 1999 and the consolidated statements of income,
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian and United States
generally accepted auditing standards. Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
2000 and 1999 and the results of its operations and its cash flows for the years
then ended in accordance with Canadian generally accepted accounting principles.
The consolidated financial statements as at December 31, 1998 and for the
year then ended, prior to adjustment for the changes in accounting policies for
revenue recognition and earnings per share as described in Note 3, were audited
by other auditors who expressed an opinion without reservation on those
statements in their report dated May 14, 1999. We have audited the adjustments
to the 1998 financial statements and in our opinion, such adjustments, in all
material respects, are appropriate and have been properly applied.
On February 26, 2001, we reported separately to the Board of Directors and
shareholders of BIOVAIL CORPORATION on financial statements for the years ended
December 31, 2000 and 1999, prepared in accordance with United States generally
accepted accounting principles.
Toronto, Canada, /s/ ERNST & YOUNG LLP
February 26, 2001. Chartered Accountants
F-2
AUDITORS' REPORT
To the Board of Directors of Biovail Corporation
We have audited the consolidated statements of income, shareholders' equity
and cash flows of Biovail Corporation, prior to adjustment for subsequent
changes in accounting policies, for the year ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, the consolidated financial statements, as originally
reported on by us, and from which the consolidated statements of income,
shareholders' equity and cash flows of the Company have been extracted, present
fairly, in all material respects, the results of its operations and its cash
flows for the year ended December 31, 1998 in accordance with Canadian generally
accepted accounting principles.
Toronto, Canada, /s/ Deloitte & Touche LLP
May 14, 1999 Chartered Accountants
F-3
BIOVAIL CORPORATION
CONSOLIDATED BALANCE SHEETS
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
AS AT DECEMBER 31
2000 1999
$ $
--------- -----------
[RESTATED
SEE NOTE 3]
ASSETS
CURRENT
Cash and cash equivalents [NOTE 5].......................... 125,144 178,086
Restricted cash............................................. -- 11,258
Short-term investments...................................... -- 54,635
Accounts receivable [NOTE 6]................................ 105,850 60,571
Inventories [NOTE 7]........................................ 24,108 12,701
Assets held for disposal [NOTE 4]........................... -- 20,000
Deposits and prepaid expenses............................... 5,347 3,172
--------- ---------
260,449 340,423
--------- ---------
Long-term investments [NOTE 8].............................. 2,454 12
Property, plant and equipment, net [NOTE 9]................. 52,541 45,300
Goodwill, net [NOTE 10]..................................... 106,930 38,514
Intangible assets, net [NOTE 11]............................ 1,027,282 206,669
Other assets, net [NOTE 12]................................. 11,311 4,219
--------- ---------
1,460,967 635,137
========= =========
LIABILITIES
CURRENT
Accounts payable............................................ 34,683 22,685
Accrued liabilities [NOTE 13]............................... 35,452 31,107
Income taxes payable........................................ 6,711 3,585
Deferred revenue............................................ 26,334 14,262
Current portion of long-term obligations [NOTE 14].......... 182,564 12,016
--------- ---------
285,744 83,655
--------- ---------
Deferred revenue............................................ 27,900 34,200
Future income taxes [NOTES 3 AND 17]........................ 52,033 --
Long-term obligations [NOTE 14]............................. 256,180 125,488
--------- ---------
621,857 243,343
--------- ---------
SHAREHOLDERS' EQUITY
Convertible Subordinated Preferred Equivalent Debentures
[NOTE 15]................................................. 301,297 --
Share capital [NOTE 16]..................................... 484,499 368,538
Stock options outstanding................................... 2,810 --
Warrants [NOTE 16].......................................... 7,912 8,244
Retained earnings........................................... 43,067 13,752
Cumulative translation adjustment........................... (475) 1,260
--------- ---------
839,110 391,794
--------- ---------
1,460,967 635,137
========= =========
Commitments and contingencies [NOTES 19 AND 21]
On behalf of the Board:
(Signed) EUGENE N. MELNYK (Signed) BRUCE D. BRYDON
Director Director and Chief Executive Officer
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
BIOVAIL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE
DATA)
YEARS ENDED DECEMBER 31
2000 1999 1998
$ $ $
--------- ----------- -----------
[RESTATED [RESTATED
SEE NOTE 3] SEE NOTE 3]
REVENUE
Product sales............................................... 224,996 100,026 69,654
Research and development.................................... 69,121 54,860 17,570
Royalty and licensing....................................... 17,340 10,206 11,612
--------- --------- ---------
311,457 165,092 98,836
--------- --------- ---------
EXPENSES
Cost of goods sold [NOTE 21]................................ 68,031 35,078 28,593
Research and development.................................... 61,823 34,515 17,490
Selling, general and administrative [NOTE 21]............... 65,380 31,382 17,608
--------- --------- ---------
195,234 100,975 63,691
--------- --------- ---------
Operating income............................................ 116,223 64,117 35,145
Interest income (expense), net [NOTE 14].................... 19,064 (9,152) (1,702)
Premium paid on early extinguishment of U.S. Dollar Senior
Notes [NOTE 14]........................................... (20,039) -- --
Equity loss [NOTE 4]........................................ -- (1,618) --
Gain on disposal of long-term investments, net [NOTE 8]..... -- 1,948 --
--------- --------- ---------
Income before provision for income taxes.................... 115,248 55,295 33,443
Provision for income taxes [NOTE 17]........................ 5,795 4,215 2,024
--------- --------- ---------
Net income.................................................. 109,453 51,080 31,419
Interest on Convertible Subordinated Preferred Equivalent
Debentures [NOTE 15]...................................... (28,290) -- --
--------- --------- ---------
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS.............. 81,163 51,080 31,419
========= ========= =========
EARNINGS PER SHARE [NOTES 3 AND 18]
Basic....................................................... $ 0.63 $ 0.50 $ 0.29
Diluted..................................................... $ 0.57 $ 0.47 $ 0.29
========= ========= =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING [000S]
[NOTE 18]
Basic....................................................... 128,824 102,542 106,564
Diluted..................................................... 143,512 108,174 108,944
========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
BIOVAIL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
CONVERTIBLE
SUBORDINATED
PREFERRED SHARE CAPITAL STOCK RETAINED CUMULATIVE
EQUIVALENT ------------------- OPTIONS EARNINGS TRANSLATION
DEBENTURES SHARES AMOUNT OUTSTANDING WARRANTS (DEFICIT) ADJUSTMENT TOTAL
$ (000S) $ $ $ $ $ $
------------ -------- -------- ----------- --------- --------- ----------- --------
Balance, December 31, 1997, as
originally reported......... -- 106,644 18,465 -- 8,244 49,709 (960) 75,458
Change in accounting policy
for revenue recognition
[NOTE 3].................... -- -- -- -- -- (18,100) -- (18,100)
------- ------- ------- ------ ----- ------- ------ -------
Balance, December 31, 1997, as
restated.................... -- 106,644 18,465 -- 8,244 31,609 (960) 57,358
Issued on the exercise of
options..................... -- 1,880 3,886 -- -- -- -- 3,886
Issued under Employee Stock
Purchase Plan............... -- 8 43 -- -- -- -- 43
Cancelled under stock
repurchase program.......... -- (9,088) (1,761) -- -- (70,380) -- (72,141)
Effect of changes in exchange
rates....................... -- -- (1,205) -- -- -- -- (1,205)
Net income.................... -- -- -- -- -- 31,419 -- 31,419
Foreign currency translation
adjustment.................. -- -- -- -- -- -- (269) (269)
------- ------- ------- ------ ----- ------- ------ -------
Balance, December 31, 1998, as
restated.................... -- 99,444 19,428 -- 8,244 (7,352) (1,229) 19,091
Issued on the exercise of
options..................... -- 1,336 7,629 -- -- -- -- 7,629
Issued under Employee Stock
Purchase Plan............... -- 6 40 -- -- -- -- 40
Cancelled under stock
repurchase program.......... -- (2,931) (617) -- -- (29,976) -- (30,593)
Issued pursuant to equity
offering.................... -- 20,360 259,590 -- -- -- -- 259,590
Issue costs................... -- -- (13,538) -- -- -- -- (13,538)
Issued on acquisition of Fuisz
Technologies Ltd............ -- 6,177 96,006 -- -- -- -- 96,006
Net income.................... -- -- -- -- -- 51,080 -- 51,080
Foreign currency translation
adjustment.................. -- -- -- -- -- -- 2,489 2,489
------- ------- ------- ------ ----- ------- ------ -------
Balance, December 31, 1999, as
restated.................... -- 124,392 368,538 -- 8,244 13,752 1,260 391,794
Change in accounting policy
for income taxes
[NOTE 3].................... -- -- -- -- -- (51,848) -- (51,848)
Issued on the exercise of
options..................... -- 2,436 13,725 -- -- -- -- 13,725
Issued under Employee Stock
Purchase Plan............... -- 5 150 -- -- -- -- 150
Issued pursuant to equity
offering.................... -- 4,000 101,125 -- -- -- -- 101,125
Issue costs................... -- -- (5,782) -- -- -- -- (5,782)
Convertible Subordinated
Preferred Equivalent
Debentures:
Issued pursuant to
offering.................. 300,000 -- -- -- -- -- -- 300,000
Financing costs............. (11,228) -- -- -- -- -- -- (11,228)
Accretion of principal and
interest components....... 28,290 -- -- -- -- (28,290) -- --
Interest paid............... (15,750) -- -- -- -- -- -- (15,750)
Conversion.................. (15) -- 15 -- -- -- -- --
Issued on exercise of
warrants.................... -- 601 6,342 -- (332) -- -- 6,010
Issue of non-employee
options..................... -- -- -- 590 -- -- -- 590
Additional share issued on
acquisition of Fuisz
Technologies Ltd............ -- 27 386 -- -- -- -- 386
DJ Pharma, Inc.:
Fair value of unvested
options granted to
employees on
acquisition............... -- -- -- 7,480 -- -- -- 7,480
Unearned compensation
relating to future service
period at acquisition
date...................... -- -- -- (5,721) -- -- -- (5,721)
Compensation cost for
employee stock options.... -- -- -- 461 -- -- -- 461
Net income.................... -- -- -- -- -- 109,453 -- 109,453
Foreign currency translation
adjustment.................. -- -- -- -- -- -- (1,735) (1,735)
------- ------- ------- ------ ----- ------- ------ -------
BALANCE, DECEMBER 31, 2000.... 301,297 131,461 484,499 2,810 7,912 43,067 (475) 839,110
======= ======= ======= ====== ===== ======= ====== =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
BIOVAIL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
YEARS ENDED DECEMBER 31
2000 1999 1998
$ $ $
-------- ----------- -----------
[RESTATED [RESTATED
SEE NOTE 3] SEE NOTE 3]
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. 109,453 51,080 31,419
Depreciation and amortization............................... 30,163 10,140 4,957
Future income taxes [NOTE 17]............................... 185 -- --
Premium paid on early extinguishment of U.S. Dollar Senior
Notes [NOTE 14]........................................... 20,039 -- --
Compensation cost for employee stock options................ 461 -- --
Equity loss [NOTE 4]........................................ -- 1,618 --
Gain on disposal of long-term investments, net [NOTE 8]..... -- (1,948) --
-------- -------- -------
160,301 60,890 36,376
Net change in non-cash operating items [NOTE 20]............ (47,230) 20,123 17,197
-------- -------- -------
CASH PROVIDED BY OPERATING ACTIVITIES....................... 113,071 81,013 53,573
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment, net............. (15,845) (7,759) (3,920)
Acquisition of businesses, net of cash acquired [NOTES 4 AND
20]....................................................... (614,685) (43,720) --
Proceeds from sale of assets held for disposal [NOTE 4]..... 20,000 -- --
Maturity of (additions to) short-term investments, net...... 65,893 (54,665) --
Acquisition of product rights............................... (27,752) (38,340) (4,000)
Disposal (acquisition) of long-term investments [NOTE 8].... (2,454) 11,991 (10,043)
Repayment of Executive Stock Purchase Plan loans............ -- 3,100 10
Acquisition of royalty interest............................. -- -- (15,000)
-------- -------- -------
CASH USED IN INVESTING ACTIVITIES........................... (574,843) (129,393) (32,953)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of share capital [NOTE 16]......................... 109,604 253,721 3,929
Repurchase of share capital [NOTE 16]....................... -- (30,593) (72,141)
Proceeds from exercise of warrants [NOTE 16]................ 6,010 -- --
Issuance of Convertible Subordinated Preferred Equivalent
Debentures, net of financing costs [NOTE 15].............. 288,772 -- --
Interest paid on Convertible Subordinated Preferred
Equivalent Debentures [NOTE 15]........................... (15,750) -- --
Advances under revolving term credit facility, net of
financing costs [NOTE 14]................................. 207,000 -- --
Repurchase of U.S. Dollar Senior Notes [NOTE 14]............ (141,017) -- --
Issuance of U.S. Dollar Senior Notes, net of financing
costs..................................................... -- -- 120,400
Reduction in other long-term obligations.................... (45,602) (75,212) (21,838)
Increase in other long-term obligations..................... -- -- 19,143
-------- -------- -------
CASH PROVIDED BY FINANCING ACTIVITIES....................... 409,017 147,916 49,493
-------- -------- -------
Effect of exchange rate changes on cash and cash
equivalents............................................... (187) 271 (109)
-------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (52,942) 99,807 70,004
Cash and cash equivalents, beginning of year................ 178,086 78,279 8,275
-------- -------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... 125,144 178,086 78,279
======== ======== =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-7
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
1. GOVERNING STATUTE AND NATURE OF OPERATIONS
Biovail Corporation ["BIOVAIL" OR THE "COMPANY"] is incorporated under the
laws of the Province of Ontario, Canada. The Company is a fully integrated
international pharmaceutical company applying advanced proprietary
controlled-release drug delivery technology to the development of superior
branded and cost-effective generic formulations of medications for the
treatment of chronic medical conditions. The Company is engaged in all
stages of pharmaceutical development, from research and development through
clinical testing and regulatory filings to full-scale manufacturing. The
Company's common shares trade on the New York and Toronto Stock Exchanges.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements have been prepared by the Company in
U.S. dollars and in accordance with Canadian generally accepted accounting
principles ["GAAP"], applied on a consistent basis. The accounting
principles differ in certain respects from U.S. GAAP as described in
note 24.
As of January 1, 2000, the Company began to report its consolidated results
in accordance with U.S. GAAP. Consolidated financial statements prepared in
U.S. dollars and in accordance with U.S. GAAP are made available to all
shareholders and filed with various regulatory authorities.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and those of all of its subsidiaries. All significant intercompany
transactions and balances have been eliminated.
USE OF ESTIMATES
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 consolidated financial statements and the
reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from these estimates. Significant estimates made
by management include the calculation of reserves for uncollectible
accounts, sales returns, allowances and rebates, useful lives of long-lived
assets, including intangibles, and the realizability of future tax assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of all financial assets and liabilities, other than
the Convertible Subordinated Preferred Equivalent Debentures and
U.S. Dollar Senior Notes, approximates their carrying value at December 31,
2000 and 1999. Fair value of a financial instrument is defined as the amount
of consideration that would be agreed upon in an arm's length transaction
between knowledgeable, willing parties who are under no compulsion to act.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less when purchased. Cash equivalents are
carried at cost, which approximates fair value.
Short-term investments are generally held to maturity and are carried at
cost, which approximates fair value. Short-term investments include highly
liquid investments with original maturities greater than three months but
less than one year when purchased. Short-term investments generally consist
of high-grade commercial paper and U.S. government treasury bills.
Realized gains and losses on cash equivalents and short-term investments are
included in net income and are immaterial for all periods presented.
INVENTORIES
Inventories are comprised of raw materials, work in process and finished
goods, which are valued at the lower of cost and replacement cost, on a
first-in, first-out basis. The costs of raw materials and acquired finished
goods inventories are the purchase price of the
F-8
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
product and attributable direct costs, less trade discounts. The cost of
manufactured inventory includes the purchase price of raw materials, direct
labour, and the application of attributable overheads.
LONG-TERM INVESTMENTS
Long-term investments are reported at cost less any provision for a loss in
value that is other than a temporary decline.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are reported at cost, less accumulated
depreciation. Depreciation is computed using the straight-line method based
on the following estimated useful lives:
Buildings................................................... 25 years
Machinery and equipment..................................... 5-10 years
Other equipment............................................. 3-5 years
Leasehold improvements...................................... term of lease
GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets are reported at cost, less accumulated
amortization. Amortization is computed using the straight-line method based
on the following estimated useful lives:
Goodwill.................................................... 20 years
Workforce................................................... 6-10 years
Acquired research and development........................... 5-15 years
Core technology............................................. 15 years
Brand names................................................. 20 years
Product rights and royalty interests........................ 10-20 years
The Company reviews long-lived identifiable assets and goodwill for
impairment whenever events or changes in circumstance indicate that the
carrying amount of the assets may not be recoverable by comparing the
carrying amount to the related, estimated discounted future net cash flows.
OTHER ASSETS
Other assets include deferred financing costs related to the revolving term
credit facility, which are reported at cost, less accumulated amortization.
The deferred financing costs are amortized over the three year term of the
facility. Amortization expense is included as a component of interest
expense.
INCOME TAXES
The liability method of tax allocation is used. Under this method, future
tax assets and liabilities are recognized for the differences between the
financial statement and income tax bases of assets and liabilities, and for
operating losses and tax credit carryforwards. A valuation allowance is
provided for the portion of future tax assets which are "more likely than
not" to be unrealized. Future tax assets and liabilities are measured using
the substantively enacted tax rates and laws expected to apply when the
assets are expected to be realized or the liabilities are expected to be
settled.
REVENUE RECOGNITION
PRODUCT SALES -- Product sales revenue is recognized when the product is
shipped to the customer, provided the Company has not retained any
significant risks of ownership or future obligations with respect to the
product shipped. Revenue from product sales is recognized net of sales
discounts, allowances and amounts payable to licensors. In certain
circumstances the Company allows customers to return or exchange products
and, accordingly, the Company maintains provisions for estimated product
returns or exchanges.
F-9
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Amounts received from customers as prepayments for products to be shipped in
the future are reported as deferred revenue. When the products are shipped
at a future date, they are billed to the customer at the contractual rate.
RESEARCH AND DEVELOPMENT -- Research and development revenue attributable to
the performance of contract services is recognized as the services are
performed, in accordance with the terms of the specific development
contract. On long-term research and development arrangements, revenue is
recognized relative to the total level of effort necessary to meet all
regulatory and developmental requirements. Costs and related profit margin
in excess of amounts billed are included in accounts receivable. Amounts
billed in excess of costs and related profit margin are included in deferred
revenue. 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.
ROYALTY AND LICENSING -- Royalty revenue is recognized on an accrual basis
in accordance with the contractual agreements and when the Company has no
future obligations pursuant to the royalty fee. Royalty revenue is net of
amounts payable to sublicensees where the Company is simply acting as an
agent for the sublicensee. 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.
RESEARCH AND DEVELOPMENT
Research costs are expensed in the period in which they are incurred;
development costs are expensed in the period in which they are incurred
unless they meet the criteria for deferral. To December 31, 2000, no
development costs have been deferred. Acquired research and development, and
the cost of intangibles that are purchased from others for a particular
research and development project, are deferred and amortized over their
estimated useful lives, which range from five to fifteen years.
ADVERTISING COSTS
Advertising and promotion costs related to new product launches are expensed
upon the first showing of the product. Advertising expense for 2000, 1999
and 1998 was $3,434,000, $4,955,000 and $1,968,000, respectively.
REPORTING CURRENCY AND FOREIGN CURRENCY TRANSLATIONS
The Company reports its consolidated financial statements in U.S. dollars.
The financial statements of the parent company and its
non-U.S. subsidiaries are translated into U.S. dollars. Asset and liability
accounts are translated at the rate of exchange prevailing at the balance
sheet date. Shareholders' equity accounts are translated at the applicable
historical rate. Revenue and expense accounts are translated at the average
rate of exchange for the period. The cumulative foreign currency translation
adjustment is reported as a component of shareholders' equity. The net
change in the cumulative foreign currency translation adjustment in the
periods presented is primarily due to fluctuations in the exchange rates
between the Company's reporting currency and the Canadian dollar, Irish
pound and Swiss franc.
Foreign currency transaction gains and losses are included in net income,
and are immaterial for all periods presented.
STOCK OPTION PLAN
No compensation expense is recognized when stock options are issued to
employees under the Company's stock option plan. Any consideration paid by
employees on the exercise of stock options is credited to share capital.
Options issued to non-employees are fair valued at the date of grant using
the Black-Scholes option pricing model.
EARNINGS PER SHARE
Earnings per share are calculated based on net income attributable to common
shareholders. Basic earnings per share are calculated using the weighted
average number of common shares outstanding during the year. The computation
of diluted earnings per share assumes the basic weighted average number of
common shares outstanding during the year is increased to include the number
of additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. The dilutive
F-10
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
effect of warrants and stock options is determined using the treasury stock
method. The dilutive effect of convertible securities is determined using
the "if-converted" method.
3. CHANGES IN ACCOUNTING POLICIES
REVENUE RECOGNITION
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, 1998.
These policies are generally accepted under both U.S. and Canadian GAAP.
Accordingly, the Company changed its method of accounting to that described
in the revenue recognition accounting policy 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, 1998, the cumulative
effect of the change in accounting policy on prior years resulted in a
charge to retained earnings of $18,100,000. For 2000, the effect was to
increase revenue by $9,300,000.
Amounts as originally reported are as follows:
1999 1998
$ $
-------- --------
Deferred revenue............................................ 4,962 4,516
Retained earnings........................................... 57,252 24,748
Revenue..................................................... 176,492 112,836
Net income attributable to common shareholders.............. 62,480 45,419
Earnings per share
Basic..................................................... 0.61 0.43
Diluted................................................... 0.58 0.42
======= =======
Amounts as restated are as follows:
1999 1998
$ $
-------- --------
Deferred revenue............................................ 48,462 36,616
Retained earnings (deficit)................................. 13,752 (7,352)
Revenue..................................................... 165,092 98,836
Net income attributable to common shareholders.............. 51,080 31,419
Earnings per share
Basic..................................................... 0.50 0.29
Diluted................................................... 0.47 0.29
======= ======
INCOME TAXES
Effective January 1, 2000, the Company adopted the new recommendations of
The Canadian Institute of Chartered Accountants' ["CICA"] Handbook
Section 3465, "Income Taxes". Accordingly, the liability method of tax
allocation is used as described in the income tax accounting policy.
Previously, the deferral method was used, based on differences in the timing
of reporting income and expenses in the financial statements and tax
returns. The new recommendations have been applied retroactively without
restatement of the financial statements of prior years. At January 1, 2000,
the cumulative effect of this change in accounting policy on prior years
resulted in a charge of $51,848,000 to retained earnings, a decrease in
goodwill of $32,892,000, and a net increase in future income tax liability
of $18,956,000. The adjustment was primarily the result of the 1999
acquisition of Fuisz Technologies Ltd. and the recognition of the tax
consequences of the differences between the assigned values and tax bases of
the acquired assets and liabilities and the recognition of the tax benefit
of the available loss carryforwards.
F-11
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
3. CHANGES IN ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Effective December 31, 2000, the Company adopted the new recommendations of
CICA Handbook Section 3500, "Earnings Per Share". Accordingly, basic and
diluted earnings per share are calculated using the methodology described in
the earnings per share accounting policy. The new recommendations have been
applied retroactively to restate all diluted earnings per share amounts in
these consolidated financial statements.
4. ACQUISITIONS
2000 ACQUISITIONS
During 2000, the Company completed the acquisitions of Intelligent Polymers
Limited, the Cardizem-Registered Trademark- product line and
DJ Pharma, Inc. These acquisitions were accounted for under the purchase
method of accounting. Total consideration, including acquisition costs, was
allocated based on estimated fair values on the respective dates of
acquisition as follows:
INTELLIGENT DJ
POLYMERS CARDIZEM-REGISTERED TRADEMARK- PHARMA,
LIMITED PRODUCTS INC. TOTAL
$ $ $ $
----------- ------------------------------ -------- --------
Current assets........................................... 3,287 -- 14,705 17,992
Equipment................................................ -- -- 672 672
Deferred compensation trust fund......................... -- -- 8,268 8,268
Assembled workforce...................................... -- -- 5,200 5,200
Acquired research and development........................ 208,424 -- -- 208,424
Brand names and product rights........................... 5,000 406,070 130,500 541,570
Goodwill................................................. -- -- 103,389 103,389
Current liabilities...................................... (14,270) -- (22,844) (37,114)
Future tax liability..................................... -- -- (32,892) (32,892)
Deferred compensation obligation......................... -- -- (8,268) (8,268)
Debt assumed............................................. -- -- (34,169) (34,169)
-------- -------- -------- --------
202,441 406,070 164,561 773,072
======== ======== ======== ========
Consideration
Cash paid, net of cash acquired........................ 202,441 239,652 162,802 604,895
Issue of non-employee options.......................... -- 590 -- 590
Fair value of options granted to employees............. -- -- 1,759 1,759
Accrued acquisition costs.............................. -- 4,000 -- 4,000
Aventis obligation..................................... -- 161,828 -- 161,828
-------- -------- -------- --------
202,441 406,070 164,561 773,072
======== ======== ======== ========
INTELLIGENT POLYMERS LIMITED
BACKGROUND
In July 1997, Intelligent Polymers Limited, a Bermuda corporation
["INTELLIGENT POLYMERS"] was formed primarily to develop once-daily
controlled-release branded versions of selected drugs whose chemical patents
and/or exclusivity periods had or were about to expire and which were
marketed only in immediate-release form or in controlled-release form
requiring multiple daily dosing.
In September 1997, the Company concluded a development and license agreement
[THE "DEVELOPMENT CONTRACT"] and a services agreement with Intelligent
Polymers, whereby the Company would develop the designated products on
Intelligent Polymers' behalf.
In an initial public offering in October 1997, 3,737,500 units of
Intelligent Polymers were sold to the public, resulting in net proceeds to
Intelligent Polymers, after offering costs, of approximately $69,500,000.
The proceeds of the offering were used by Intelligent Polymers to make
payments to the Company under the Development Contract.
F-12
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
4. ACQUISITIONS (CONTINUED)
Payments received by the Company from Intelligent Polymers pursuant to the
Development Contract were $55,200,000 for the period ended September 29,
2000 and $33,000,000 and $9,700,000 for the years ended December 31, 1999
and 1998, respectively. The cost of providing these services to Intelligent
Polymers was $35,200,000 for the period ended September 29, 2000 and
$19,800,000 and $6,700,000 for the years ended December 31, 1999 and 1998,
respectively.
In December 1999, the Company exercised its option to acquire the rights to
the generic version of Procardia XL, developed on behalf of Intelligent
Polymers, for $25,000,000. The right to Procardia XL was capitalized and is
being amortized over its estimated useful life of ten years.
The Company, as the holder of all of the issued and outstanding special
shares of Intelligent Polymers, had an option, exercisable at its sole
discretion, to purchase all, but not less than all, of the outstanding
common shares of Intelligent Polymers commencing on the closing date of the
offering and ending on the earlier of September 30, 2002, or the 90th day
after the date Intelligent Polymers provided the Company with quarterly
financial statements showing cash or cash equivalents of less than
$3,000,000. If the purchase option had been exercised, the purchase price
calculated on a per share basis would have been as follows:
PURCHASE OPTION
EXERCISE PRICE
$
---------------
Before October 1, 2000...................................... 39.06
On or after October 1, 2000 and on or before September 30,
2001...................................................... 48.83
On or after October 1, 2001 and on or before September 30,
2002...................................................... 61.04
=====
DESCRIPTION OF ACQUISITION
On September 29, 2000, the Company sold all of its interest in and to the
special shares of Intelligent Polymers to IPL Acquireco 2000 Ltd., a British
Virgin Islands company ["IPL ACQUIRECO"], in exchange for 12,000 non-voting
common shares of IPL Acquireco, valued at $12,000. In addition, the Company
invested $141,500,000 in non-voting Class A shares of IPL Acquireco. On the
same date, IPL Acquireco, as holder of the special shares of Intelligent
Polymers, consummated the purchase of all the issued and outstanding common
shares of Intelligent Polymers and thereby Intelligent Polymers became a
wholly-owned subsidiary of IPL Acquireco. As a result of IPL Acquireco's
acquisition of Intelligent Polymers, certain provisions of the Development
Contract were amended such that Intelligent Polymers took over the
development of the designated products, including directly contracting with,
and making payments to, third parties.
The Company, as holder of all of the non-voting common shares of IPL
Acquireco, had the option, exercisable at its sole discretion, to purchase
all of the voting common shares of IPL Acquireco at any time prior to
October 1, 2002. IPL Acquireco had 6,500,000 voting common shares issued and
outstanding.
On December 29, 2000, the Company exercised its option to purchase all the
voting common shares of IPL Acquireco for a total redemption price of
$6,750,000. Contemporaneously with the acquisition of IPL Acquireco, the
Company repaid the bank credit facility of Intelligent Polymers, which
amounted to $56,616,000. Accordingly, the total consideration for the
acquisition of IPL Acquireco, including the value of the Class A and special
shares, was $204,878,000. The assets, liabilities and expenses of IPL
Acquireco and Intelligent Polymers have been included in these consolidated
financial statements from December 29, 2000.
ACQUIRED RESEARCH AND DEVELOPMENT
At the date of acquisition, the products under development were in various
stages of completion, had not reached technological feasibility, had no
known alternative uses, and were considered to be in-process research and
development. The efforts required to develop the acquired research and
development into commercially viable products include the completion of the
development stages of the products, clinical-trial testing, U.S. Federal
Drug Administration ["FDA"] approval, and commercialization. The principal
risks relating to the products in development are the outcomes of the
formulation development, clinical studies and regulatory filings. At the
date of acquisition, none of the products had been submitted for approval
with the FDA. Since pharmaceutical products cannot be marketed without
regulatory approvals, the Company will not receive any benefits unless
regulatory approval is obtained.
F-13
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
4. ACQUISITIONS (CONTINUED)
INTANGIBLE ASSET
Intelligent Polymers had acquired as part of its development activities the
rights to a cardiovascular product. This product right has been included in
the value of the net assets of Intelligent Polymers acquired, and will be
amortized over its estimated useful life.
PRO FORMA INFORMATION
The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company, IPL Acquireco and
Intelligent Polymers as if the acquisition had occurred on January 1, 1999.
All transactions between the Company and Intelligent Polymers have been
eliminated. A full year of amortization is included in the consolidated
results of both periods presented.
2000 1999
$ $
-------- --------
Total revenue............................................... 255,946 132,092
Net loss attributable to common shareholders................ (35,803) (46,622)
Basic and diluted loss per share............................ (0.28) (0.45)
======= =======
These unaudited pro forma consolidated results have been prepared for
comparative purposes only. They do not purport to be indicative of the
results of operations which actually would have resulted had IPL Acquireco
and Intelligent Polymers been included in the Company's consolidated
financial statements from January 1, 1999. In addition, they do not purport
to be indicative of future consolidated results of operations of the
Company.
CARDIZEM-REGISTERED TRADEMARK- PRODUCTS
DESCRIPTION OF ACQUISITION
On December 28, 2000, the Company acquired the North American rights to the
Cardizem-Registered Trademark- product lines [THE
"CARDIZEM-REGISTERED TRADEMARK- PRODUCTS"] from Aventis
Pharmaceuticals, Inc. and its affiliates ["AVENTIS"].
Cardizem-Registered Trademark- is a leading calcium channel blocker
prescribed for the treatment of hypertension and angina. The Company
acquired all the intangible assets associated with the products including
the patents, regulatory files, trademarks, manufacturing know-how,
copyrights and other intellectual property. The Company obtained the
beneficial rights to and the interest in the Cardizem-Registered Trademark-
Products effective December 31, 2000, and will obtain full legal rights and
title on December 31, 2001, following the completion of the payments
described below.
The purchase price for the Cardizem-Registered Trademark- Products was
$409,500,000 in cash comprised of an initial payment of $239,500,000, and
the balance of $170,000,000 payable equally over the four quarters of 2001.
The remaining payments have been present valued based on an imputed interest
rate of approximately 8%, which was comparable to the Company's available
borrowing rate as at the date of the transaction. Accordingly, the present
value of the remaining payments was determined to be $161,828,000, resulting
in a discount of $8,172,000. The total discounted purchase price was
$406,070,000, including costs of acquisition of $4,742,000, which has been
allocated entirely to intangible assets. The intangible assets will be
amortized over their estimated useful lives of twenty years.
MANUFACTURING AND TRANSITIONAL SERVICES AGREEMENTS
In connection with the acquisition, the Company entered into manufacturing
and transitional services agreements with Aventis under which Aventis will
continue to manufacture, supply and provide distribution services for
specified periods to the Company for the Cardizem-Registered Trademark-
Products. The terms of these agreements are summarized as follows:
Aventis will manufacture and package, or cause another party to manufacture
and package, the Cardizem-Registered Trademark- Products for sale by the
Company. The term of the agreement is from January 1, 2001 to December 31,
2003, with a right to extend the term at the Company's option, subject to
certain conditions, if by the end of the term the Company is unable to
successfully manufacture the Cardizem-Registered Trademark- Products on its
own behalf, or is unable to reach an agreement with a second source
supplier. In addition to the manufacturing supply price, the Company agreed
to pay additional consideration under the manufacturing agreement of
$5,000,000, $3,000,000 and $2,000,000 on January 2, 2001, 2002 and 2003,
respectively.
Aventis has agreed to reimburse the Company for transitional expenses
incurred by the Company including general and administrative, manufacturing,
inventory write-offs, and sales and marketing expenses related to the
Cardizem-Registered Trademark- Products. The reimbursements are
F-14
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
4. ACQUISITIONS (CONTINUED)
limited to $11,000,000 and $10,000,000 for transitional expenses incurred in
the two calendar quarters ending June 30, 2001 and December 31, 2001,
respectively.
PRO FORMA INFORMATION
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company including the contribution
from the Cardizem-Registered Trademark- Products as if the acquisition had
occurred on January 1, 1999. The contribution includes only direct expenses
related to the Cardizem-Registered Trademark- Products and, as such, does
not include any allocation of indirect selling, general and administrative
expenses. A full year of amortization, and interest expense on advances
under the revolving term credit facility, are included in the consolidated
results of both periods presented. Included in the consolidated results of
1999 is the amortization of the imputed interest on the Aventis obligation.
2000 1999
$ $
-------- --------
Total revenue............................................... 569,612 812,592
Net income attributable to common shareholders.............. 231,393 467,324
Basic earnings per share.................................... 1.80 4.56
Diluted earnings per share.................................. 1.61 4.32
======= =======
These unaudited pro forma consolidated results have been prepared for
comparative purposes only. They do not purport to be indicative of the
results of operations which actually would have resulted had the
contribution from the Cardizem-Registered Trademark- Products been included
in the Company's consolidated financial statements from January 1, 1999. In
addition, they do not purport to be indicative of future consolidated
results of operations of the Company.
DJ PHARMA, INC. [RENAMED BIOVAIL PHARMACEUTICALS INC.]
DESCRIPTION OF ACQUISITION
On October 6, 2000, the Company acquired DJ Pharma, Inc. ["DJ PHARMA"], for
$165,127,000, including costs of acquisition of $868,000 and the fair value
of unvested DJ Pharma employee stock options. The total fair value of the
unvested options granted to employees of DJ Pharma was determined to be
$7,480,000, of which $1,759,000 was allocated to the purchase price, and
$5,721,000 was allocated to deferred compensation, based on ratios of the
past and future service periods divided by the total service period,
respectively. The assets, liabilities, revenue and expenses of DJ Pharma
have been included in the consolidated financial statements of the Company
from October 6, 2000.
DJ Pharma was organized to market and sell patented and branded generic
prescription pharmaceutical products for the treatment of respiratory and
allergy conditions, and for skin and soft tissue infections. DJ Pharma
obtained the rights to certain products from Dura Pharmaceuticals, Inc. and
one of its subsidiaries ["DURA"]. The products obtained from Dura include a
patented broad-spectrum antibiotic ["KEFTAB"] used primarily for the
treatment of respiratory and skin infections developed by Eli Lilly &
Company; a line of prescription cough, cold and allergy branded generic
products ["DURA-VENT"] developed by Dura; and a line of prescription cough,
cold and allergy branded generic products ["RONDEC"] developed by Abbot
Laboratories. DJ Pharma also had the exclusive rights to sell and market
Schering Corporation's ["SCHERING"] antibiotic Cedax in the United States.
Cedax is an antibiotic indicated for the treatment of chronic bronchitis,
middle ear infection and tonsillitis.
DJ Pharma had an assembled workforce mainly involved in the sales and
marketing of its products.
ASSEMBLED WORKFORCE
At the acquisition date, the Company obtained the services of approximately
300 DJ Pharma employees, consisting primarily of sales account managers and
representatives. The assembled workforce was fair valued using a cost
approach, and is estimated to have a useful life of six years.
F-15
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
4. ACQUISITIONS (CONTINUED)
PRODUCT RIGHTS
At the acquisition date, DJ Pharma had various purchase, licensing and
supply agreements covering branded products and product families such as
Keftab, Dura-Vent, Rondec and Cedax. These contracts provide the Company
with a stream of identifiable benefits resulting from the sale of these
products. Under the agreement with Dura, DJ Pharma obtained exclusive rights
to Keftab, Dura-Vent and Rondec through to December 31, 2002 in return for
payment of certain license fees based on a percentage of net sales, subject
to annual maximums [THE "DURA AGREEMENT"]. At the expiration of the Dura
Agreement, DJ Pharma obtains Dura's rights to Dura-Vent worldwide and its
rights to Rondec and Keftab within the United States. Under the agreement
with Schering, DJ Pharma obtained the co-exclusive right to market Cedax in
the United States. At the termination of the agreement, all rights to the
product revert back to Schering. The products under the license agreements
were valued using an income approach, based on the present value of the
incremental revenue and corresponding cash flow that could be lost in the
absence of these contracts. The discount rate used was an after-tax
market-derived rate of 18%. The fair value of the Keftab, Dura-Vent and
Rondec products was determined to be $96,500,000, with estimated useful
lives of twenty years. The fair value of the Cedax product was determined to
be $34,000,000, with an estimated useful life of ten years, based on the
remaining term of the Schering agreement.
DEFERRED COMPENSATION
DJ Pharma initiated an Executive Deferred Compensation Plan to provide
certain employees with the opportunity to supplement their retirement income
through the deferral of pre-tax income. The initial funding of the plan was
through compensation deferrals by the plan participants. Those funds,
totaling $8,268,000, were placed in trust and invested to purchase life
insurance policies (recorded at the cash surrender value) in the name of
each participant. The terms of the trust agreement state that the assets of
the trust are available to satisfy the claims of general creditors of the
company in the event of bankruptcy, thereby qualifying the trust as a rabbi
trust for U.S. income tax purposes. The assets of the trust have been
consolidated with the accounts of the employer in the financial statements
of the employer, with the corresponding amount recorded as a deferred
compensation obligation. Changes in the value of the assets held by the
trust are recorded in earnings each period, with a corresponding charge
(credit) to compensation expense to reflect the fair value of the amount
owed to the participants.
FUTURE INCOME TAXES
At the acquisition date, the Company recognized a net future income tax
liability of $32,892,000 for the tax consequences of differences between the
assigned values and tax bases of DJ Pharma's acquired assets and
liabilities, excluding goodwill.
SUBSEQUENT TRANSACTION
On December 27, 2000, DJ Pharma and Dura agreed to amend certain provisions
of the Dura Agreement, with the effect that the second closing date under
the agreement was accelerated from December 31, 2002. Consequently, DJ
Pharma obtained the ownership to the Dura-Vent and Rondec product lines,
including the trademarks, regulatory history, formulations, manufacturing
know-how and marketing information, and the assignment of Dura's license
rights to the Keftab product line, as of the amendment date. In
consideration, DJ Pharma agreed to make the maximum remaining license
payments under the Dura Agreement, and to settle the promissory note payable
and the product acquisition notes payable to Dura, plus accrued interest to
the amendment date. The remaining maximum license payments amounted to
$19,800,000 and have been capitalized to product rights, and the settlement
of the principal plus interest due under the notes amounted to $28,100,000.
F-16
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
4. ACQUISITIONS (CONTINUED)
PRO FORMA INFORMATION
The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company and DJ Pharma as if the
acquisition had occurred on January 1, 1999. A full year of amortization is
included in the consolidated results of both periods presented.
2000 1999
$ $
-------- --------
Total revenue............................................... 343,669 202,273
Net income attributable to common shareholders.............. 69,890 45,293
Basic earnings per share.................................... 0.54 0.44
Diluted earnings per share.................................. 0.49 0.42
These unaudited pro forma consolidated results have been prepared for
comparative purposes only. They do not purport to be indicative of the
results of operations which actually would have resulted had DJ Pharma been
included in the Company's consolidated financial statements from January 1,
1999. In addition, they do not purport to be indicative of future
consolidated results of operations of the Company.
1999 ACQUISITION
FUISZ TECHNOLOGIES LTD. [RENAMED BIOVAIL TECHNOLOGIES LTD.]
DESCRIPTION OF ACQUISITION
On November 12, 1999, the Company completed the acquisition of Fuisz
Technologies Ltd. ["FUISZ"] for $177,897,000 including costs relating to the
acquisition. Fuisz is an international company that is engaged in the
development, manufacturing and commercialization of a wide range of drug
delivery, nutraceutical and food ingredient products utilizing its
proprietary CEFORM-Registered Trademark-, SHEARFORM-Registered Trademark-
and other drug delivery technologies [THE "FUISZ TECHNOLOGY"].
Fuisz was acquired through a series of transactions which began in
July 1999 with the purchase of certain Fuisz common stock and the
announcement on July 25, 1999 that the Company had entered into a merger
agreement to acquire the remaining common stock of Fuisz in a two-stage
transaction consisting of a cash tender offer and a stock-for-stock merger.
By September 4, 1999, the Company had completed the acquisition of 49% of
Fuisz's outstanding common stock for cash consideration of $75,565,000
pursuant to the cash tender offer and other purchase transactions. On
November 12, 1999, Biovail acquired the remaining common stock of Fuisz by
issuing 6,176,620 common shares of the Company, with a fair value of
$96,006,000. The value of the common shares issued by the Company was
determined by reference to the average market price of the Company's common
shares before and after the date of acquisition on November 12, 1999 and
after giving effect to the normal costs of the issue of shares.
PURCHASE PRICE ALLOCATION
The Company accounted for the acquisition of Fuisz as a step acquisition
using the purchase method of accounting. The Company has recognized in these
consolidated financial statements its 49% equity interest in the results of
Fuisz for the period from September 4, 1999, the date it acquired
significant influence, to November 12, 1999, the date of acquisition of
control. The equity loss for this period amounted to $1,618,000. The assets,
liabilities, revenue and expenses of Fuisz have been included in these
consolidated financial statements from November 12, 1999.
F-17
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
4. ACQUISITIONS (CONTINUED)
The purchase price of $177,897,000, which includes acquisition costs of
$6,326,000, was allocated as follows:
Current assets.............................................. $ 60,617
Assets held for disposal.................................... 20,000
Buildings and equipment..................................... 16,893
Acquired research and development........................... 137,470
Intangible assets........................................... 358
Workforce................................................... 2,041
Core technology............................................. 11,185
Goodwill.................................................... 37,224
Current liabilities......................................... (21,820)
Debt assumed................................................ (86,071)
--------
PURCHASE PRICE.............................................. $177,897
========
Included in the provision for restructuring costs related to the acquisition
of Fuisz, established by the Company at the date of acquisition, was
$10,000,000 for the settlement of a pre-acquisition contract. The settlement
of this contract was a contingency that existed prior to the acquisition of
Fuisz, and the amount of the provision was based on the information
available to the Company at that time. The provision was included in the
determination of the net assets of Fuisz acquired. During 2000, the Company
entered into a final settlement of this pre-acquisition contract.
During 2000, the Company issued 27,000 additional common shares in relation
to the acquisition of Fuisz with a fair value of $386,000. The cash
settlement of the contract and the issuance of additional common shares
resulted in a charge of $7,460,000 to net income.
FUTURE INCOME TAXES
Effective January 1, 2000, upon the adoption of the new recommendations for
income taxes described in the changes in accounting policies, the Company
recognized a net future income tax liability of $57,656,000 for the tax
consequences of differences, as at the acquisition date of November 12,
1999, between the assigned values and tax bases of Fuisz's acquired assets
and liabilities, excluding goodwill. In addition, the Company recognized
$32,892,000 of tax benefits for available Fuisz U.S. tax loss carryforwards
as at the acquisition date, resulting in a corresponding reduction in the
value of Fuisz goodwill acquired.
ACQUIRED RESEARCH AND DEVELOPMENT
The Fuisz Technology involves drug delivery platforms and the application of
such platforms to specific product development programs. At the date of
acquisition, Fuisz was involved in seventeen product development projects
for a number of pharmaceutical companies which were in various stages of
completion. With the exception of certain nutraceutical products, the Fuisz
Technology had not been employed in any product which had received
regulatory approval to date and was considered to have no alternative future
use other than for the therapeutic indications for which it was in
development or which may be developed. Accordingly, technological
feasibility of the products related to the Fuisz Technology was not
established at the acquisition date and was considered to be in-process
research and development.
Two of the projects had been submitted for approval with the applicable
regulatory authorities. One project was submitted to the FDA in June 1998
and the other was submitted to the Medical Control Agency in the
U.K. ["MCA"] in April 1998. The remaining fifteen projects were expected to
be completed in accordance with Fuisz's contractual obligations with the
relevant customers over the next eighteen months.
The development projects were estimated to be 65% complete on average,
estimated peak sales were approximately $942,000,000 per annum, estimated
costs to completion of these products were approximately $9,500,000 and a
discount rate of 28% was used. The average time to full completion of the
remaining work for the projects in development was estimated to be
approximately twelve months. The work remaining to complete the products in
development involved ongoing formulation, bio-equivalency, safety and
efficacy studies and the submission of regulatory filings to seek marketing
approvals. The principal risks relating to the acquired technology were the
outcomes of such clinical trials and Biovail's ability to negotiate
acceptable commercial terms with the
F-18
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
4. ACQUISITIONS (CONTINUED)
pharmaceutical companies developing the products. As pharmaceutical products
cannot be marketed without regulatory approvals, the Company will not
receive any benefits unless regulatory approval is obtained.
If the projects under development are successful, the Company expects that
the Fuisz Technology will have an extended life cycle. Because the Fuisz
Technology is based on drug delivery, the technology can be applied to
numerous products. Although the risk of technological feasibility is always
present in each product, the Company's strategy is to exploit the technology
through numerous product developments which the Company expects will occur
over at least fifteen years from the date of acquisition.
In April 2000, one of the products under development at the acquisition date
received approval from the MCA. The product, a rapid dissolve form of
ibuprofen, represented the first commercial introduction of a product
utilizing the Fuisz Technology.
ASSETS HELD FOR DISPOSAL
The Company determined, as part of its evaluation of the purchase of Fuisz,
that certain operations of Fuisz were not strategic to Biovail's business
plans and accordingly should be sold.
Prior to the completion of the stock exchange, on October 22, 1999, Fuisz
agreed to sell all of the issued shares of three of its wholly-owned
European subsidiaries for proceeds of $28,700,000. Further, Fuisz agreed to
assign all of the rights, privileges and advantages from its Cebutid
trademark to the purchaser of its European subsidiaries for proceeds of
$10,273,000. No gain or loss was recognized by the Company on these
transactions as these subsidiaries were included in the purchase price
allocation at their fair value when Biovail acquired its 49% interest in
Fuisz.
On December 1, 1999, with an effective date of January 4, 2000, the Company
entered into an agreement to sell all of the issued share capital of Clonmel
Healthcare Limited ["CLONMEL"], a pharmaceutical and antibiotic manufacturer
and distributor located in Ireland, for proceeds of $20,000,000. The Company
recognized no gain or loss on this transaction as Clonmel was included at
its fair value in the purchase price allocation on November 12, 1999.
Under the terms of the sale of Clonmel, the Company repaid an IRL8,452,000
term bank loan connected with the 1997 acquisition of Clonmel by Fuisz,
utilizing the restricted cash balance of $11,258,000 that was pledged as
collateral against the term bank loan at December 31, 1999.
PRO FORMA INFORMATION
The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company and Fuisz as if the
acquisition, disposals and repayment of convertible subordinated debentures
had occurred on January 1, 1998. A full year of amortization and interest
costs is included for both periods presented.
1999 1998
$ $
-------- --------
Total revenue............................................... 177,018 111,835
Net income (loss) attributable to common shareholders....... 10,492 (17,089)
Basic and diluted earnings (loss) per share................. 0.09 (0.15)
======= =======
These unaudited pro forma consolidated results have been prepared for
comparative purposes only. They do not purport to be indicative of the
results of operations which actually would have resulted had Fuisz been
included in the Company's consolidated financial statements from January 1,
1998. In addition, they do not purport to be indicative of future
consolidated results of operations of the Company.
F-19
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
5. CASH AND CASH EQUIVALENTS
2000 1999
$ $
-------- --------
Cash and bank certificates of deposit....................... 65,784 38,776
Money market funds and corporate debt securities............ 59,360 139,310
------- -------
125,144 178,086
======= =======
6. ACCOUNTS RECEIVABLE
2000 1999
$ $
-------- --------
Trade (net of allowance for doubtful accounts of $4,049,000
and $3,255,000 for 2000 and 1999, respectively)........... 98,442 50,458
Royalties................................................... 3,565 3,176
Other....................................................... 3,843 6,937
------- ------
105,850 60,571
======= ======
The Company performs ongoing credit evaluations of customers and generally
does not require collateral. Allowances are maintained for potential credit
losses. Three customers accounted for 61% and 82% of trade and royalties
receivable at December 31, 2000 and 1999, respectively. The Company believes
that there is no unusual exposure associated with the collection of these
receivables.
7. INVENTORIES
2000 1999
$ $
-------- --------
Raw materials............................................... 7,140 5,149
Work in process............................................. 5,079 4,258
Finished goods.............................................. 11,889 3,294
------ ------
24,108 12,701
====== ======
8. LONG-TERM INVESTMENTS
2000 1999
$ $
-------- --------
Investment in Hemispherx Biopharma, Inc..................... 2,250 --
Other securities............................................ 204 --
Investment in Intelligent Polymers.......................... -- 12
----- --
2,454 12
===== ==
In February 2000, the Company invested $2,250,000 in common shares of
Hemispherx Biopharma, Inc. ["HEMISPHERX"]. The investment represents
approximately 1% of the outstanding common shares of Hemispherx. The fair
value of the investment at December 31, 2000 was $1,357,000.
In September 2000, the 12,000 special shares of Intelligent Polymers,
acquired by the Company in 1997, were sold to IPL Acquireco.
During 1999, the Company sold certain long-term investments, which had been
acquired in 1998, for a net gain of $1,948,000.
F-20
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
9. PROPERTY, PLANT AND EQUIPMENT
2000 1999
----------------------- -----------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
$ $ $ $
-------- ------------ -------- ------------
Land........................................................ 4,419 -- 1,270 --
Buildings................................................... 19,489 4,553 17,423 3,724
Machinery and equipment..................................... 30,054 10,701 24,914 7,366
Other equipment and leasehold improvements.................. 20,233 6,400 15,873 3,090
------ ------ ------ ------
74,195 21,654 59,480 14,180
Less accumulated depreciation............................... 21,654 14,180
------ ------
52,541 45,300
====== ======
Depreciation expense amounted to $8,096,000, $4,138,000 and $3,074,000 in
2000, 1999 and 1998, respectively.
10. GOODWILL
2000 1999
$ $
-------- --------
Cost........................................................ 112,440 42,053
Less accumulated amortization............................... 5,510 3,539
------- ------
106,930 38,514
======= ======
Amortization expense amounted to $2,058,000, $2,018,000 and $204,000 in
2000, 1999 and 1998, respectively.
11. INTANGIBLE ASSETS
2000 1999
$ $
--------- --------
Workforce................................................... 7,241 2,041
Core technology............................................. 11,185 11,185
Acquired research and development........................... 345,894 137,470
Brand names, product rights and royalty interests
Cardizem-Registered Trademark- Products................... 406,070 --
Keftab, Dura-Vent, Rondec and Cedax....................... 154,089 --
Adalat Product............................................ 64,720 9,000
Procardia XL.............................................. 25,000 25,000
Tiazac-Registered Trademark-.............................. 15,000 15,000
Other..................................................... 22,217 11,602
--------- -------
1,051,416 211,298
Less accumulated amortization............................... 24,134 4,629
--------- -------
1,027,282 206,669
========= =======
Amortization expense amounted to $19,830,000, $3,286,000 and $1,551,000 in
2000, 1999 and 1998, respectively.
F-21
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
11. INTANGIBLE ASSETS (CONTINUED)
ADALAT PRODUCT
On October 4, 1999, Biovail and Elan Corporation, plc ["ELAN"] entered into
a licensing and supply agreement, whereby Biovail obtained a license to
distribute Elan's generic version of Adalat CC 30mg dosage [THE "ADALAT
PRODUCT"] in exchange for royalties based on a percentage of sales. The
Company first launched the Adalat Product in March 2000. Elan manufactures
and supplies the Adalat Product to Biovail.
On December 29, 2000, Biovail and Elan agreed to certain amendments to the
licensing and supply agreement [THE "AMENDED AGREEMENT"], effective
January 1, 2000. The initial term of the Amended Agreement is fifteen years
from the date of first commercial sale. Under the terms of the Amended
Agreement, Biovail will pay to Elan annual minimum license payments,
exclusive of the direct manufacturing cost of the Adalat Product purchased
from Elan.
The minimum license payments have been capitalized as a product right, with
a corresponding long-term obligation to Elan. The value assigned to the
product right and obligation was the present value of the minimum license
payments based on an imputed interest rate of approximately 8%, which was
comparable to the Company's available borrowing rate as at the date of the
transaction. Accordingly, the present value of the minimum license payments
was determined to be $64,720,000, resulting in a discount of $8,780,000. The
product right will be amortized over its estimated useful life, which is the
remaining initial term of the Amended Agreement. At the end of the initial
term, the Amended Agreement continues automatically for subsequent two-year
periods, unless terminated by either party.
12. OTHER ASSETS
2000 1999
$ $
-------- --------
Deferred financing costs.................................... 3,000 5,024
Less accumulated amortization............................... -- 805
------ -----
3,000 4,219
Deferred compensation trust fund............................ 8,311 --
------ -----
11,311 4,219
====== =====
Amortization expense related to deferred financing costs amounted to
$179,000, $698,000 and $128,000 in 2000, 1999 and 1998, respectively.
At December 31, 1999, the deferred financing costs related to the
U.S. Dollar Senior Notes [THE "SENIOR NOTES"], and the amortization expense
in 2000 related to these costs. In March 2000, the remaining unamortized
costs were written off upon the Company's repurchase of the Senior Notes.
13. ACCRUED LIABILITIES
2000 1999
$ $
-------- --------
Accrued product returns, rebates and chargebacks............ 16,895 798
Employee costs.............................................. 5,696 4,528
Provision for restructuring costs........................... 3,482 13,597
Royalties................................................... 3,355 1,331
Professional fees........................................... 2,438 2,163
Interest.................................................... 426 1,736
Product rights.............................................. -- 1,524
Other....................................................... 3,160 5,430
------ ------
35,452 31,107
====== ======
F-22
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
13. ACCRUED LIABILITIES (CONTINUED)
At December 31, 2000, the provision for restructuring costs comprises
$1,602,000 related to the acquisition of DJ Pharma and $1,880,000
(1999 -- $13,597,000) related to the acquisition of Fuisz. These costs were
included in the determination of the net assets of DJ Pharma and Fuisz
acquired, respectively.
At December 31, 2000, the provision for restructuring costs related to the
acquisition of DJ Pharma consists of employee costs of $1,362,000 and
$240,000 of other costs.
At December 31, 2000, the provision for restructuring costs related to the
acquisition of Fuisz consists of $1,000,000 (1999 -- $11,250,000) for the
settlement of contracts, $880,000 (1999 -- $1,303,000) for the termination
of employees and nil (1999 -- $1,044,000) of other costs. The reduction in
the provision was substantially the result of cash payments made during
2000.
14. LONG-TERM OBLIGATIONS
2000 1999
$ $
-------- --------
Revolving term credit facility [i].......................... 210,000 --
Aventis obligation [ii]..................................... 161,828 --
Elan obligation [iii]....................................... 58,090 --
Deferred compensation....................................... 8,311 --
Non-interest bearing government loan [iv]................... 470 1,250
U.S. Dollar Senior Notes [v]................................ -- 125,000
Term bank loan [vi]......................................... -- 10,799
Other debt.................................................. 45 455
------- -------
438,744 137,504
Less current portion........................................ 182,564 12,016
------- -------
256,180 125,488
======= =======
(i) REVOLVING TERM CREDIT FACILITY
On December 27, 2000, the Company entered into a definitive agreement with
The Bank of Nova Scotia [THE "BANK"] for a revolving term $300,000,000
Senior Secured Credit Facility [THE "CREDIT FACILITY"]. The Credit Facility
is fully underwritten by the Bank in anticipation of syndication to the Bank
and other financial institutions [THE "LENDERS"] who may commit to a portion
of the Credit Facility. The Credit Facility is revolving in nature for the
initial term of 364 days and may be extended at the request of the Company
and at the sole discretion of the Lenders for additional periods of up to
364 days. If the Lenders elect not to extend the revolving period of the
Credit Facility, the Company may elect to convert amounts then outstanding
to a non-revolving facility with a final maturity date two years from the
then current revolving period maturity date. In this event, advances shall
be repaid by equal quarterly instalments through the term period.
Accordingly, the Credit Facility has been classified as a long-term
obligation.
Borrowings under the Credit Facility are secured by a charge over
substantially all of the assets and undertakings, including intellectual
property, of the Company. The credit agreement includes certain financial
and non-financial covenants. The financial covenants require the Company to
meet or exceed certain minimum thresholds for shareholders' equity and
interest coverage, and not to exceed a maximum threshold in respect of the
ratio of debt to earnings before interest, taxes, depreciation and
amortization. Non-financial covenants include, but are not limited to,
restrictions on acquisition, capital and debt restructuring related activity
exceeding established thresholds. Upon a change in control, the holder of
the Credit Facility has the right to require the Company to settle the
entire Credit Facility, plus accrued and unpaid interest at the date of
settlement.
Borrowings may be by way of U.S. dollar London Interbank Offering Rate
["LIBOR"] or U.S. Base Rate advances or Canadian dollar Prime Rate or
Bankers' Acceptance ["BA"] advances. Interest is charged at the Bank's
quoted rate plus a borrowing margin of 1.375% to 2% in the case of LIBOR and
BA advances, and 0.375% to 1% in the case of Base Rate and Prime Rate
advances, depending on the Company's credit rating at the time of such
borrowing. The effective rate of interest at December 31, 2000 was 8.84%.
F-23
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
14. LONG-TERM OBLIGATIONS (CONTINUED)
(ii) AVENTIS OBLIGATION
The Aventis obligation of $170,000,000 was assumed on the acquisition of the
Cardizem-Registered Trademark- Products. The obligation, which is
non-interest bearing, has been discounted by $8,172,000, based on an imputed
interest rate of approximately 8%. The obligation is payable in quarterly
instalments of $42,500,000 on March 30, June 29, September 28 and
December 28, 2001.
(iii) ELAN OBLIGATION
The Elan obligation of $73,500,000 reflects the minimum license payments
assumed under the Amended Agreement for the Adalat Product. The obligation,
which is non-interest bearing, has been discounted by $8,780,000 based on an
imputed interest rate of approximately 8%. The first instalment of
$17,500,000, which is payable on January 5, 2001, has been recorded net of
$6,630,000 due to the Company from Elan. The remaining instalments are
payable quarterly in the following gross annual amounts:
2001 -- $16,000,000; 2002 -- $14,000,000; 2003 -- $10,000,000;
2004 -- $8,000,000; and 2005 -- $8,000,000.
(iv) NON-INTEREST BEARING GOVERNMENT LOAN
The non-interest bearing government loan is payable to Western Economic
Diversification, a Canadian federal government agency. The final payment is
due in 2001.
(v) U.S. DOLLAR SENIOR NOTES
Issued under an indenture dated November 16, 1998, the Senior Notes were
general unsecured senior obligations, which bore interest at 10 7/8%,
payable semi-annually in arrears on May 15 and November 15 of each year. The
Senior Notes were due to mature on November 15, 2005.
At December 31, 1999, the fair value of the Senior Notes was $128,388,000.
In March 2000, the Company repurchased all of its outstanding Senior Notes
at a redemption price of 112.820% of the principal amount, plus accrued
interest. The premium paid by the Company of $16,017,000 consisted of a
consent payment of $2,500,000 and a premium of $13,517,000 calculated by
reference to the bid price and yield on March 6, 2000 for the 5 3/4%
U.S. Treasury Note due November 20, 2002. The premium paid along with the
unamortized deferred financing costs on the Senior Notes are reported as a
charge to net income.
(vi) TERM BANK LOAN
The term bank loan of IRL8,452,000 bore interest at the bank's reference
rate plus margin (aggregate rate of 4.13% at December 31, 1999). The loan
was collateralized by a restricted cash balance of $11,258,000, which was
used to repay the loan in January 2000.
INTEREST
Interest expense on long-term obligations amounted to $3,059,000,
$13,594,000 and $2,358,000 for the years ended December 31, 2000, 1999 and
1998, respectively.
PRINCIPAL REPAYMENTS
Principal repayments on long-term obligations for the years ending
December 31 are as follows:
$
--------
2001........................................................ 182,564
2002........................................................ 116,835
2003........................................................ 114,219
2004........................................................ 7,388
2005........................................................ 7,466
2006........................................................ 1,961
Thereafter.................................................. 8,311
-------
438,744
=======
F-24
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
15. CONVERTIBLE SUBORDINATED PREFERRED EQUIVALENT DEBENTURES
2000 1999
$ $
-------- --------
Interest component.......................................... 38,514 --
Principal component......................................... 219,280 --
Holder conversion option.................................... 43,503 --
------- ---
301,297 --
======= ===
In accordance with CICA recommendations, the Convertible Subordinated
Preferred Equivalent Debentures [THE "DEBENTURES"] are presented within
shareholders' equity to reflect the Company's option to pay the interest and
principal using the proceeds from the sale of common shares or other equity
securities of the Company. The value of the Debentures is comprised of the
holder conversion option and the interest and principal components. The
value ascribed to the option component was determined using the residual
method after calculating the amount attributable to the interest and
principal components, which were discounted at a rate of interest that would
have approximated the rate applicable to non-convertible debt at the time
the Debentures were issued. The present value of the interest and principal
components amounted to $256,494,000, resulting in a value of $43,506,000
being ascribed to the holder conversion option. The present value of the
interest and principal components is being accreted to the face value of the
payments over the three year period preceding the first redemption date on
March 31, 2003, and is included in the determination of net income
attributable to common shareholders. The principal component is reported net
of financing costs.
DESCRIPTION
The Company issued under an indenture dated March 22, 2000, 6,000,000
Debentures, due on March 31, 2025 for gross proceeds of $300,000,000. After
deducting financing costs of $11,228,000, the net proceeds from the issue
amounted to $288,772,000. The Debentures are unsecured and subordinated to
all senior indebtedness, as defined, of the Company. At the holders' option,
the Debentures are convertible at any time into common shares of the Company
at $30.337 per common share.
During 2000, 300 Debentures, with a face value of $15,000, were converted
into 494 common shares of the Company.
INTEREST
The Debentures bear interest at 6.75%, payable quarterly in arrears on
March 31, June 30, September 30 and December 31 of each year. Subject to
certain conditions, the Company has the right to defer payment of interest
on the Debentures for up to twenty consecutive quarterly periods. At the
option of the Company, the deferred interest may be paid using the proceeds
from the sale of common shares or other equity securities of the Company.
Interest expense on the Debentures amounted to $15,750,000 for the period
ended December 31, 2000.
OPTIONAL REDEMPTION
On or after March 31, 2003, the Company may, at its option, redeem, in whole
or in part, the Debentures at the following prices, plus accrued and unpaid
interest, if redeemed during the twelve month period commencing on March 31
of the years indicated:
REDEMPTION
PRICE
%
-----------
2003........................................................ 104.725
2004........................................................ 104.050
2005........................................................ 103.375
2006........................................................ 102.700
2007........................................................ 102.025
2008........................................................ 101.350
2009........................................................ 100.675
2010 and thereafter......................................... 100.000
F-25
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
15. CONVERTIBLE SUBORDINATED PREFERRED EQUIVALENT DEBENTURES (CONTINUED)
The principal and interest payable on any redemption date are payable in
cash by the Company or, at the option of the Company, may be paid using the
proceeds from the sale of common shares or other equity securities of the
Company.
SPECIAL REDEMPTION
At any time prior to March 31, 2003, other than during periods where the
Company has elected to defer the payment of interest, the Company may redeem
the Debentures at its option, in whole or in part, at 106.750% of the
principal amount plus accrued and unpaid interest, if the trading price of
the Company's common shares equals or exceeds $45.505 per share on the
New York Stock Exchange for 20 trading days within 30 consecutive trading
days ending one day prior to the day on which the Company sends out a
special redemption notice. If the Company undertakes a special redemption,
the holders of the Debentures called for redemption will receive an
additional payment in an amount equal to the present value of the aggregate
amount of the interest that would have thereafter been payable on the
Debentures from the special redemption date to March 31, 2003. The present
value would be calculated using the bond equivalent yield on U.S. Treasury
notes or bills having a term nearest in length to that of the additional
period. The Company would be obligated to make the additional payment on all
the Debentures called for special redemption, whether or not those
Debentures are converted into common shares prior to the special redemption
date.
FAIR VALUE
At December 31, 2000, the fair value of the Debentures, based on the quoted
market price, was $428,979,000.
16. SHARE CAPITAL
AUTHORIZED AND ISSUED SHARES
STOCK SPLITS
In October 2000, pursuant to shareholders' consent received at the 2000
annual meeting, the Company's common shares split on a 2 for 1 basis.
In December 1999, the shareholders of the Company authorized a 2 for 1 stock
split and an increase in authorized shares to an unlimited number of common
shares without par value.
All share and per share amounts in these consolidated financial statements
have been retroactively adjusted to give effect to the stock splits.
SHARE OFFERINGS
In March 2000, concurrent with the offering of the Debentures, the Company
completed a share offering by issuing 4,000,000 common shares for gross
proceeds of $101,125,000 less issue costs of $5,782,000.
In October 1999, the Company completed a share offering by issuing
20,360,000 common shares for gross proceeds of $259,590,000 less issue costs
of $13,538,000.
STOCK REPURCHASE PROGRAM
During 1998, the Company implemented a stock repurchase program under which
the Company was able to purchase up to 10% of its issued and outstanding
common shares. Prior to December 31, 1998, 9,087,600 common shares had been
repurchased under this program at a cost of $72,141,000. The excess of the
cost of the common shares acquired over the stated capital thereof, totaling
$70,380,000, was charged to retained earnings. During 1999, 2,930,800 common
shares were repurchased at a cost of $30,593,000. The excess of the cost of
the common shares acquired over the stated capital thereof, totalling
$29,976,000, was charged to retained earnings. The program was terminated
with no further common shares repurchased.
STOCK OPTION PLAN
Under the Company's Stock Option Plan, as amended [THE "PLAN"], the Company
may grant to directors, officers, employees, consultants and advisors,
options to purchase common shares of the Company. The purpose of the Plan is
to provide long-term incentives and rewards to certain of the Company's
directors, officers, employees, consultants and advisors. The aggregate
number of
F-26
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
16. SHARE CAPITAL (CONTINUED)
shares reserved for issuance under the Plan, taking into consideration the 2
for 1 stock splits completed in October 2000 and December 1999, shall not
exceed 28,000,000 common shares. The number of shares reserved for issuance
to any one person under the Plan, together with shares which that person may
acquire under any similar plan of the Company, may not exceed 5% of the
total issued and outstanding common shares. Under the Plan, the Company
designates the maximum number of shares that are subject to an option. The
exercise price per share of an option is the closing market price at which
the common shares are traded on the New York Stock Exchange on the day prior
to the date the option is granted, or if not so traded, the average between
the closing bid and ask prices thereof as reported for that day.
The option vesting terms vary based on the type of option. Management
options granted prior to January 1, 1999 vest as to one-third each year
commencing on the first anniversary of the grant and will expire on a date
not later than five years from the date of the grant.
Options granted after January 1, 1999 vest as follows: Executive options
vest pursuant to the terms and conditions of the employment agreement;
special options vest on the second anniversary date of the grant; management
options vest as to one-fourth each year commencing on the first anniversary
of the grant and expire not later than seven years from the date
of the grant.
The following table summarizes the Company's stock option activity for the
three years ended December 31, 2000, taking into effect the 2 for 1 stock
splits in October 2000 and December 1999:
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
[000S] $
-------- --------------
OUTSTANDING BALANCE, DECEMBER 31, 1997...................... 10,079 6.29
Granted..................................................... 1,204 8.79
Exercised................................................... (1,882) 2.14
Forfeited................................................... (560) 7.67
------ -----
OUTSTANDING BALANCE, DECEMBER 31, 1998...................... 8,841 6.91
Granted..................................................... 3,369 18.57
Exercised................................................... (1,334) 5.72
Forfeited................................................... (429) 7.37
------ -----
OUTSTANDING BALANCE, DECEMBER 31, 1999...................... 10,447 10.81
Granted..................................................... 2,345 27.06
Exercised................................................... (2,436) 5.79
Forfeited................................................... (307) 18.29
------ -----
OUTSTANDING BALANCE, DECEMBER 31, 2000...................... 10,049 15.58
====== =====
The following table summarizes the information about options outstanding at
December 31, 2000:
WEIGHTED
AVERAGE
REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE
OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
RANGE OF EXERCISE PRICES $ [000S] [YEARS] $ [000S] $
-------------------------- ----------- ---------------- ---------------- ----------- ----------------
2.96 - 3.13.......................... 240 2.7 2.99 22 2.55
5.00 - 7.50.......................... 391 1.2 6.79 291 6.73
7.58 - 10.50......................... 4,986 2.3 8.22 2,567 7.91
12.77 - 17.50........................ 421 3.9 16.08 389 22.50
22.50 - 29.00........................ 2,953 6.1 22.77 -- --
36.00 - 38.84........................ 1,058 7.0 36.10 -- --
------ ----- ----- -----
10,049 15.58 3,269 9.50
====== ===== ===== =====
F-27
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
16. SHARE CAPITAL (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan ["EPP"] was approved by the
shareholders at the Special Shareholders Meeting held on January 1, 1996 and
was established in 1996. The purpose of the EPP is to provide a convenient
method for full-time employees of the Company to participate in the share
ownership of the Company or to increase their share ownership in the Company
via payroll or contractual deduction. Directors, senior officers or insiders
of the Company are not eligible to participate in the EPP. The aggregate
number of shares reserved for issuance under the EPP, taking into
consideration the 2 for 1 stock splits in October 2000 and December 1999,
shall not exceed 1,200,000 common shares. At the discretion of a committee
of the Board of Directors that will administer the EPP, the Company may
issue directly from treasury or purchase shares in the market from time to
time to satisfy the obligations under the EPP. A participant may authorize
payroll or contractual deduction up to a maximum of 10% of the base salary
or remuneration to be received during any purchase period. The purchase
price shall be 90% of the fair market value per share of stock on the date
on which the eligible period ends.
WARRANTS
In October 1997, Intelligent Polymers completed a public offering of
3,737,500 units. Each unit comprised one common share of Intelligent
Polymers and one warrant to purchase four post-split common shares of the
Company. The net proceeds to Intelligent Polymers of the offering after
offering expenses amounted to approximately $69,500,000. On September 30,
1999, the units separated and the Intelligent Polymers' common shares and
the Company's warrants traded independently of each other. The warrants are
exercisable at a per share price of $10.00 from October 1, 1999 until
September 30, 2002.
In 1997, the Company recorded a credit to equity of $8,244,000 equal to the
proceeds attributable to the warrants included in the offering as determined
at the time of their issuance and recorded a charge to retained earnings to
reflect the equivalent contribution to Intelligent Polymers.
During 2000, 150,250 warrants were exercised in exchange for 601,000 common
shares of the Company. The Company received proceeds on the exercise of
warrants of $6,010,000.
17. INCOME TAXES
The components of the provision for income taxes are as follows:
2000 1999 1998
$ $ $
-------- -------- --------
Current..................................................... 5,610 4,215 2,024
Future...................................................... 185 -- --
----- ----- -----
5,795 4,215 2,024
===== ===== =====
The reported provision for income taxes differs from the expected amount
calculated by applying the Company's Canadian statutory rate to income
before provision for income taxes. The reasons for this difference and the
related tax effects are as follows:
2000 1999 1998
$ $ $
-------- -------- --------
Income before provision for income taxes.................... 115,248 55,295 33,443
Expected Canadian statutory rate............................ 44.39% 44.81% 44.81%
------- ------- -------
Expected provision for income taxes......................... 51,159 24,778 14,986
Non-deductible amounts
Goodwill amortization..................................... 914 904 91
Compensation cost for employee stock options.............. 205 -- --
Equity loss............................................... -- 725 --
Foreign tax rate differences................................ (58,615) (31,818) (16,698)
Unrecognized income tax benefit of losses................... 10,977 8,184 3,355
Other....................................................... 1,155 1,442 290
------- ------- -------
F-28
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
17. INCOME TAXES (CONTINUED)
2000 1999 1998
$ $ $
-------- -------- --------
5,795 4,215 2,024
======= ======= =======
The Company has provided for foreign withholding taxes on the portion of
undistributed earnings of foreign subsidiaries expected to be remitted.
Future income taxes have been provided on the following temporary
differences:
2000
$
--------
Future tax assets
Tax loss carryforwards.................................... 39,837
Scientific Research and Experimental Development ["SR&ED"]
pool.................................................... 16,664
Investment tax credits.................................... 11,180
Financing costs........................................... 9,320
Other..................................................... 4,963
-------
Total future tax assets..................................... 81,964
Less valuation allowance on future tax assets............... (43,250)
-------
Net future tax assets....................................... 38,714
-------
Future tax liability
Intangible assets......................................... 90,747
-------
NET FUTURE INCOME TAX LIABILITY............................. 52,033
=======
At December 31, 2000, the Company has accumulated tax losses for federal and
provincial purposes in Canada, and for federal and state purposes in the
U.S. The Company also has unclaimed Canadian investment tax credits. The
losses and investment tax credits can be used to offset future years'
taxable income. There may be limitations on the annual utilization of the
U.S. net operating losses as a result of certain changes in ownership that
have occurred. The tax losses and investment tax credits expire as follows:
TAX LOSSES
--------------------------------
CANADA
--------------------- INVESTMENT
FEDERAL PROVINCIAL U.S. TAX CREDITS
$ $ $ $
-------- ---------- -------- -----------
2001........................................................ -- 1,173 -- 47
2002........................................................ -- 2,896 -- --
2003........................................................ 50 118 -- --
2004........................................................ 4,892 5,271 -- 430
2005........................................................ 1,757 7,995 -- 499
2006........................................................ 4,387 4,387 -- 1,116
2007........................................................ 4,859 9,721 1,398 1,224
2008........................................................ -- -- 6,068 1,478
2009........................................................ -- -- 6,745 3,175
2010........................................................ -- -- 3,109 3,207
2011........................................................ -- -- 16,424 --
2012........................................................ -- -- 15,483 --
2018........................................................ -- -- 22,132 --
2019........................................................ -- -- 13,549 --
------ ------ ------ ------
15,945 31,561 84,908 11,176
====== ====== ====== ======
F-29
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
17. INCOME TAXES (CONTINUED)
In addition, the Company has pooled SR&ED expenditures amounting to
approximately $39,400,000 available to offset against future years' taxable
income from the Canadian operations, which may be carried forward
indefinitely.
18. EARNINGS PER SHARE
Earnings per share are computed by dividing net income attributable to
common shareholders by the weighted average number of common shares
outstanding for the reporting period. Earnings per share, for all periods
presented, were calculated using the weighted average number of common
shares outstanding during each period, as follows:
2000 1999 1998
-------- -------- --------
BASIC EARNINGS PER SHARE
Net income attributable to common shareholders.............. $ 81,163 $ 51,080 $ 31,419
Weighted average number of common shares outstanding
(000s).................................................... 128,824 102,542 106,564
-------- -------- --------
BASIC EARNINGS PER SHARE.................................... $ 0.63 $ 0.50 $ 0.29
======== ======== ========
2000 1999 1998
-------- -------- --------
DILUTED EARNINGS PER SHARE
Net income attributable to common shareholders.............. $ 81,163 $ 51,080 $ 31,419
Weighted average number of common shares outstanding
(000s).................................................... 128,824 102,542 106,564
Dilutive effect of warrants (000s).......................... 9,657 3,315 --
Dilutive effect of stock options (000s)..................... 5,031 2,317 2,380
-------- -------- --------
Adjusted weighted average number of common shares
outstanding (000s)........................................ 143,512 108,174 108,944
-------- -------- --------
DILUTED EARNINGS PER SHARE.................................. $ 0.57 $ 0.47 $ 0.29
======== ======== ========
For 2000, the Debentures have been excluded from the calculation of diluted
earnings per share because the effect would have been anti-dilutive.
19. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company occupies certain facilities under lease arrangements and leases
certain equipment. Rental payments amounted to approximately $4,800,000,
$700,000 and $600,000 in 2000, 1999 and 1998, respectively.
Minimum future lease payments under operating leases for the years ending
December 31 are as follows:
$
--------
2001........................................................ 5,224
2002........................................................ 3,547
2003........................................................ 1,745
2004........................................................ 1,745
2005........................................................ 1,277
Thereafter.................................................. 1,606
=====
CAPITAL COMMITMENT
On February 7, 2000, the Company entered into an agreement to acquire a
pharmaceutical manufacturing facility located in Dorado, Puerto Rico for
$11,000,000, including a $1,000,000 deposit made on the date of the
agreement. Included in the acquisition of this facility is specialized
production and packaging equipment. The closing date is scheduled for
January 2001, at which time the Company is committed to paying the remaining
acquisition price of $10,000,000.
F-30
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
20. CASH FLOW INFORMATION
NET CHANGE IN NON-CASH OPERATING ITEMS
2000 1999 1998
$ $ $
-------- -------- --------
Accounts receivable......................................... (35,950) (9,973) (10,036)
Inventories................................................. (3,886) (1,560) 6,307
Deposits and prepaid expenses............................... (1,673) 693 (1,304)
Accounts payable............................................ (5,432) 9,214 7,363
Accrued liabilities......................................... (9,840) 7,399 (1,800)
Income taxes payable........................................ 3,779 2,604 (9)
Deferred revenue............................................ 5,772 11,746 16,676
------- ------ -------
(47,230) 20,123 17,197
======= ====== =======
ACQUISITION OF BUSINESSES, NET OF CASH ACQUIRED
2000 1999 1998
$ $ $
-------- -------- --------
Cardizem-Registered Trademark- Products..................... (239,652) -- --
Intelligent Polymers........................................ (202,441) -- --
DJ Pharma................................................... (162,802) -- --
Fuisz....................................................... (9,790) (43,720) --
-------- ------- -------
(614,685) (43,720) --
======== ======= =======
NON-CASH INVESTING AND FINANCING ACTIVITIES
2000 1999 1998
$ $ $
-------- -------- --------
Long-term obligation assumed on acquisition of
Cardizem-Registered Trademark- Products................... (161,828) -- --
Accrued acquisition costs related to the
Cardizem-Registered Trademark- Products................... (4,000) -- --
Long-term obligation assumed on license of Adalat Product... (58,090) -- --
Issuance of common shares on acquisition of Fuisz........... -- (96,006) --
-------- ------- -------
(223,918) (96,006) --
======== ======= =======
CASH PAID DURING THE YEAR
2000 1999 1998
$ $ $
-------- -------- --------
Interest paid............................................... 20,546 14,526 1,050
Income taxes paid........................................... 1,889 1,831 2,153
====== ====== =====
21. LEGAL PROCEEDINGS
From time to time, Biovail 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.
F-31
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
21. LEGAL PROCEEDINGS (CONTINUED)
In this regard, Biovail Corporation and its wholly-owned subsidiary, Biovail
Laboratories, Inc. ["BIOVAIL"], have been sued in separate lawsuits by Bayer
AG and Bayer Corporation, 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.
On April 23, 1998, Biovail filed a four-count complaint against Bayer AG,
Bayer Corporation 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 Corporation 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. commenced action
against Biovail Corporation and Biovail Laboratories, Inc. [TOGETHER
"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's motion for Injunctive Relief was denied.
Biovail will contest ANDRX's allegations aggressively, and will raise
defenses and counter-claims.
Since this action is at its initial stages, it is not possible to provide
any reasonable forecast at this time. Nevertheless, in the event that some
tests on ANDRX's generic Tiazac-Registered Trademark- show that it infringes
on Biovail's listed 463 Patent, Biovail will launch a patent infringement
suit against ANDRX.
In February 2001, Biovail Laboratories, Inc. commenced an action against
Mylan Pharmaceuticals, Inc. and Pfizer Inc. 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 Pharmaceuticals, Inc. brought an action
against the FDA alleging that the FDA had improperly granted to Biovail
Laboratories, Inc. approval of its generic version of Pfizer Inc.'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. Nevertheless, this action is in the
early stages and it is not possible to be more definitive at this time with
respect to the likely result of the suit.
In November 1999, Biovail acquired Fuisz Technologies Ltd. ("Fuisz"). Fuisz
is now a wholly-owned subsidiary of Biovail and has been renamed Biovail
Technologies Ltd. ("Biovail Technologies").
In February 2000 Biovail Technologies filed a complaint in Circuit Court of
Fairfax County, Va. against Richard C. Fuisz, former chairman of Fuisz
Technologies Ltd., and several other former Fuisz executives, directors and
employees and related parties (the "Complaint"). The Complaint charges
breaches of fiduciary duties, breaches of contract, fraud, conversion,
business conspiracy and unjust enrichment arising out of a pattern of
misconduct in which the defendants pursued their personal advancement at the
expense of Fuisz. Biovail believes that the allegations against the
defendants are meritorious and has been vigorously litigating the suit.
In response to Biovail's suit, Richard Fuisz has brought certain legal
actions intended to compel Biovail to pay to him certain consulting fees
which Biovail claims are not due because of Fuisz's breach of a Consulting
Agreement pursuant to which such fees are established. Though it is
currently premature to predict the outcome of this action, Biovail believes
that the Delaware Action is without merit and has been vigorously defending
the lawsuit.
Biovail entered into a settlement with Hoechst Aktiengesselschaft and
related parties with respect to an action commenced by Biovail in
March 1998 with respect to damages to Biovail resulting from an agreement
between Hoechst and Andrx Pharmaceuticals that had the effect of blocking
the marketing of Biovail's generic version of Cardizem-Registered Trademark-
CD.
In December 2000, the Company completed a settlement of the legal action it
had brought against Hoechst AG and related parties ["AVENTIS"]. As a result
of this settlement, the Company received the sum of $19,500,000 as a
reimbursement for expenses directly incurred in pursuing the litigation, and
other expenses reasonably related to the litigation, during 2000. The
reimbursement has been
F-32
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
21. LEGAL PROCEEDINGS (CONTINUED)
recorded as a reduction to costs of $3,700,000 included in cost of goods
sold, and to costs of $15,800,000 included in selling, general and
administrative expenses. The Company did not receive any reimbursement for
costs related to the litigation incurred prior to 2000.
22. RESEARCH AND DEVELOPMENT ARRANGEMENTS
TEVA PHARMACEUTICALS
In December 1997, the Company entered into an agreement with Teva
Pharmaceuticals USA, Inc. ["TEVA"] for the development and marketing of
certain generic oral controlled-release products. As at December 31, 2000,
generic versions of Trental, Cardizem-Registered Trademark- CD, Adalat CC,
Voltaren XR and Procardia XL have been approved by the FDA, and ANDAs for
two others have been filed with the FDA.
Under the terms of the agreement, Teva was obligated to pay the Company an
aggregate of $34,500,000, subject to certain milestones. Of the $34,500,000,
$23,500,000 related to reimbursement of research and development costs and
$11,000,000 to the initial purchase of product. Payments received by the
Company from Teva pursuant to the agreement for reimbursement of research
and development costs were $13,500,000 and $10,000,000 for 1998 and 1997,
respectively. Pursuant to a separate agreement, the Company earned research
and development revenue of $4,800,000 from Teva in 1999.
Product sales to Teva were $89,700,000, $19,100,000 and $5,000,000 in 2000,
1999 and 1998, respectively.
H. LUNDBECK A/S
In December 1998, the Company entered into an agreement with H. Lundbeck A/S
["LUNDBECK"] for formulation, development, manufacture and supply of a novel
controlled-release formulation of the anti-depressant Citalopram.
Under the terms of the agreement, Lundbeck will pay the Company product
development fees aggregating $8,500,000, subject to certain milestones.
Payments received by the Company from Lundbeck for product development,
pursuant to the agreement, were $1,000,000, $2,000,000 and $3,500,000 in
2000, 1999 and 1998, respectively.
23. SEGMENTED INFORMATION AND MAJOR CUSTOMERS
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, and sales of proprietary and
in-licensed branded products by the Company's sales and marketing
operations.
The RESEARCH AND DEVELOPMENT segment covers all revenue generated by the
Company's integrated research and development facilities, and comprises
research and development services provided to third parties, including
Intelligent Polymers prior to September 29, 2000, and product development
milestone fees.
The ROYALTY AND LICENSING segment covers royalty revenue received from
licensees in respect of products for which the Company has manufacturing,
marketing and/or intellectual property rights.
The accounting policies of the segments are the same as those described in
the significant accounting policies. The Company evaluates segment
performance based on operating income after deducting selling, general and
administrative expenses attributable to the business units. Corporate
general and administrative expenses, and interest income and expense, are
not allocated to segments. Depreciation expense related to manufacturing and
research and development assets is allocated to the Product Sales and
Research and Development segments, respectively. Amortization expense
related to royalty interests is allocated to the Royalty and Licensing
segment. Amortization expense related to product rights is allocated to the
Product Sales segment. Amortization and depreciation of administrative
assets and goodwill are included as a component of unallocated selling,
general and administrative expenses.
F-33
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
23. SEGMENTED INFORMATION AND MAJOR CUSTOMERS (CONTINUED)
INFORMATION BY REPORTABLE SEGMENTS
PRODUCT RESEARCH AND ROYALTY AND
SALES DEVELOPMENT LICENSING TOTAL
$ $ $ $
-------- ------------ ----------- ---------
2000
Revenue from external customers............................. 224,996 69,121 17,340 311,457
======= ======= ====== =========
Segment operating income.................................... 114,779 502 17,054 132,335
Unallocated amounts
Selling, general and administrative expenses.............. (16,112)
Interest income, net...................................... 19,064
Premium paid on early extinguishment of U.S. Dollar Senior
Notes................................................... (20,039)
---------
Income before provision for income taxes.................... 115,248
=========
Segment assets.............................................. 824,248 377,589 19,638 1,221,475
Unallocated amounts
Cash and investments...................................... 110,776
Goodwill and other........................................ 128,716
---------
1,460,967
=========
Segment capital expenditures, net........................... 31,402 1,916 4,000 37,318
Unallocated amount.......................................... 6,279
---------
43,597
=========
Segment depreciation and amortization....................... 12,034 13,898 1,071 27,003
Unallocated amount.......................................... 3,160
---------
30,163
=========
F-34
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
23. SEGMENTED INFORMATION AND MAJOR CUSTOMERS (CONTINUED)
PRODUCT RESEARCH AND ROYALTY AND
SALES DEVELOPMENT LICENSING TOTAL
$ $ $ $
-------- ------------ ----------- --------
1999
Revenue from external customers............................. 100,026 54,860 10,206 165,092
======= ======= ====== =======
Segment operating income.................................... 46,802 18,163 9,792 74,757
Unallocated amounts
Selling, general and administrative expenses.............. (10,640)
Equity loss............................................... (1,618)
Interest expense, net..................................... (9,152)
Gain on disposal of long-term investments, net............ 1,948
-------
Income before provision for income taxes.................... 55,295
=======
Segment assets.............................................. 139,076 169,767 18,888 327,731
Unallocated amounts
Cash and investments...................................... 183,937
Goodwill and other........................................ 123,469
-------
635,137
=======
Segment capital expenditures, net........................... 43,137 2,562 -- 45,699
Unallocated amount.......................................... 400
-------
46,099
=======
Segment depreciation and amortization....................... 3,130 4,507 1,416 9,053
Unallocated amount.......................................... 1,087
-------
10,140
=======
PRODUCT RESEARCH AND ROYALTY AND
SALES DEVELOPMENT LICENSING TOTAL
$ $ $ $
-------- ------------ ----------- --------
1998
Revenue from external customers............................. 69,654 17,570 11,612 98,836
====== ====== ====== =======
Segment operating income (loss)............................. 31,280 (1,453) 11,272 41,099
Unallocated amounts
Selling, general and administrative expenses.............. (5,954)
Interest expense, net..................................... (1,702)
-------
Income before provision for income taxes.................... 33,443
=======
Segment assets.............................................. 86,420 7,845 18,016 112,281
Unallocated amounts
Cash and investments...................................... 78,503
Other unallocated assets.................................. 9,135
-------
199,919
=======
F-35
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
23. SEGMENTED INFORMATION AND MAJOR CUSTOMERS (CONTINUED)
PRODUCT RESEARCH AND ROYALTY AND
SALES DEVELOPMENT LICENSING TOTAL
$ $ $ $
-------- ------------ ----------- --------
Segment capital expenditures, net........................... 6,383 740 15,000 22,123
Unallocated amount.......................................... 5,385
-------
27,508
=======
Segment depreciation and amortization....................... 2,209 842 1,482 4,533
Unallocated amount.......................................... 424
-------
4,957
=======
GEOGRAPHIC INFORMATION
REVENUE ([I]) LONG-LIVED ASSETS ([II])
------------------------------ -------------------------------
2000 1999 1998 2000 1999 1998
$ $ $ $ $ $
-------- -------- -------- --------- -------- --------
Canada..................................................... 21,110 16,069 10,735 39,050 32,523 23,786
United States.............................................. 226,559 109,066 65,598 420,871 201,580 --
Caribbean.................................................. 55,511 34,100 10,060 213,424 -- --
Puerto Rico and Barbados................................... -- -- -- 524,579 60,272 27,694
Other foreign countries.................................... 8,277 5,857 12,443 140 327 514
------- ------- ------ --------- ------- ------
311,457 165,092 98,836 1,198,064 294,702 51,994
======= ======= ====== ========= ======= ======
(i) Revenue is attributed to countries based on the location of customer.
(ii) Consists of property, plant and equipment, goodwill, intangible and
other assets, net of depreciation and amortization.
MAJOR CUSTOMERS
PERCENTAGE OF TOTAL
REVENUE
------------------------------
2000 1999 1998
% % %
-------- -------- --------
Customer A.................................................. 30 43 58
Customer B.................................................. 30 16 8
Customer C.................................................. 18 21 10
== == ==
24. U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements of the Company have been prepared in
accordance with Canadian GAAP and differ in certain respects from those
prepared under U.S. GAAP.
F-36
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
24. U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
(a) DESCRIPTION OF DIFFERENCES
The differences as they apply to the Company's consolidated financial
statements are as follows:
PRODUCT LAUNCH ADVERTISING COSTS
Under U.S. GAAP, companies are required to write-off certain product launch
advertising costs incurred during the year. The adjustments represent the
portion of product launch costs deferred under Canadian GAAP that was
written off under U.S. GAAP.
LONG-TERM INVESTMENTS
Under U.S. GAAP, specifically the Financial Accounting Standards Board
["FASB"], Statement of Financial Accounting Standard ["SFAS"] No. 115,
"Accounting for Certain Investments in Debt and Equity Securities",
long-term investments are generally classified as available-for-sale and
accordingly are reported at fair value and the change in net unrealized
gains or losses on these investments is included in other comprehensive
income (loss) in shareholders' equity. Under Canadian GAAP, long-term
investments are reported at cost less any provision for a loss in value that
is other than a temporary decline.
ACQUISITION OF FUISZ
Under U.S. GAAP, the acquisition of Fuisz was valued based on the stock
market price of the Company's common shares before and after the July 25,
1999 date of the agreement. Under Canadian GAAP, the acquisition was valued
based on the average price of the Company's common shares before and after
the date of acquisition on November 12, 1999. In addition, under U.S. GAAP
certain other consideration was included in the purchase price. The net
effect was that under U.S. GAAP the total consideration for the acquisition
of Fuisz was lower by $6,743,000 reducing the goodwill acquired by an equal
amount.
Under U.S. GAAP, specifically SFAS No. 38, "Accounting for Preacqusition
Contingencies of Purchased Enterprises", the cash settlement of the Fuisz
pre-acquisition contract and the issuance of additional common shares
related to the acquisition of Fuisz were allocated to goodwill acquired.
Under Canadian GAAP, adjustments to the purchase equation subsequent to the
acquisition date are charged to net income.
ACQUIRED RESEARCH AND DEVELOPMENT
Under U.S. GAAP, specifically SFAS No. 2, "Accounting for Research and
Development Costs", acquired research and development having no alternative
future use must be written off at the time of acquisition. For 2000,
acquired research and development resulted from the acquisition of
Intelligent Polymers. For 1999, acquired research and development resulted
from the acquisition of Fuisz and the purchase from Intelligent Polymers of
the rights to Procardia XL. The adjustments represent the value of acquired
research and development, net of amortization, which is capitalized under
Canadian GAAP.
INCOME TAXES
Under U.S. GAAP, income taxes are recorded in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under Canadian GAAP, in accordance with the
new CICA recommendations, the Company changed its accounting policy for
income taxes effective January 1, 2000. The new recommendations were applied
retroactively without restatement of the financial statements of prior
years. The new recommendations are in most regards conceptually the same as
under U.S. GAAP. Under both pronouncements, the liability method of tax
allocation is used with future/deferred assets and liabilities determined
using substantively enacted tax rates under Canadian GAAP and enacted tax
rates under U.S. GAAP. Future/deferred tax assets and liabilities are
recognized for the differences between the financial statement and income
tax bases of assets and liabilities, and for operating losses and tax credit
carryforwards. The adjustments primarily arise from the difference under
Canadian and U.S. GAAP between the assigned value compared to the tax base
of acquired research and development resulting from the acquisition of
Fuisz, and the resulting recognition of the benefits of available tax loss
carryforwards in the allocations of the purchase price on the acquisitions
of Fuisz and DJ Pharma.
Under Canadian GAAP, the amortization of acquired research and development
related to Fuisz resulted in a partial reversal of the future tax liability
that was recognized for the difference between the capitalized assigned
value and tax base. The reversal of the future tax liability resulted in a
corresponding reduction in the provision for future income taxes.
F-37
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
24. U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
CONVERTIBLE SUBORDINATED PREFERRED EQUIVALENT DEBENTURES
Under U.S. GAAP, specifically Accounting Principles Board Opinion ["APB"]
No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants", no portion of the proceeds from the issuance of convertible debt
securities is attributed to the conversion feature. Accordingly, under
U.S. GAAP the Debentures have been reported at their face value as a
long-term liability. Under Canadian GAAP, the Debentures are presented
within shareholders' equity and the value of the Debentures is comprised of
the holder conversion option, determined using the residual method, and the
present value of the interest and principal components. The present value of
the interest and principal components is being accreted to the face value of
the payments and is included in the determination of net income attributable
to common shareholders.
Under U.S. GAAP, the financing costs related to the Debentures are deferred
and included in other assets, and are reported at cost less accumulated
amortization. The deferred financing costs are amortized over the 25 year
term of the Debentures. Amortization expense is included as a component of
interest expense. Under Canadian GAAP, the financing costs were deducted
from the principal component of the Debentures at the time of issue.
STOCK OPTIONS
Under U.S. GAAP, specifically APB No. 25, "Accounting for Stock Issued to
Employees", compensation expense is recognized for certain employee stock
option plans.
WARRANTS
Under U.S. GAAP, companies are required to record in paid-up capital an
amount equal to the proceeds attributable to warrants as determined at the
time of their issuance, along with an offsetting contra equity account
called "warrant subscription receivable". The warrants comprised part of the
units issued by Intelligent Polymers through a public offering. Payments
received from Intelligent Polymers, pursuant to the Development Agreement,
were prorated between research and development revenue and the warrant
subscription receivable. Under Canadian GAAP, the offsetting amount was
recorded as a charge to retained earnings to reflect the equivalent
contribution to Intelligent Polymers.
REVENUE RECOGNITION
Under U.S. GAAP, pursuant to SAB 101 the cumulative effect of the change in
accounting principle on prior years was recorded as a charge to the net loss
for 2000. Under Canadian GAAP, the effect of the change in accounting policy
for revenue recognition was recorded on a retroactive basis as an adjustment
to prior years' reported revenue and net income.
PREMIUM PAID ON EARLY EXTINGUISHMENT OF U.S. DOLLAR SENIOR NOTES
Under U.S. GAAP, specifically SFAS No. 4, "Reporting Gains and Losses From
Extinguishment of Debt", the premium paid together with the unamortized
deferred financing costs on the Senior Notes are reported as an
extraordinary item. Under Canadian GAAP, the premium paid and the
unamortized deferred financing costs are not accorded extraordinary
treatment.
F-38
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
24. U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
(b) BALANCE SHEET ADJUSTMENTS
2000 1999
$ $
-------- --------
LONG-TERM INVESTMENTS
Balance under Canadian GAAP................................. 2,454 12
Unrealized holding loss on long-term investments............ (893) --
----- --
Balance under U.S. GAAP..................................... 1,561 12
===== ==
2000 1999
$ $
-------- --------
GOODWILL, NET
Balance under Canadian GAAP................................. 106,930 38,514
Settlement of Fuisz pre-acquisition contract................ 7,460 --
Value of consideration on acquisition of Fuisz.............. (6,743) (6,743)
Recognition of tax consequences of available tax loss
carryforwards............................................. (3,750) --
Adjustment to amortization of goodwill resulting from above
differences............................................... (792) --
------- ------
Balance under U.S. GAAP..................................... 103,105 31,771
======= ======
2000 1999
$ $
--------- ---------
INTANGIBLE ASSETS, NET
Balance under Canadian GAAP................................. 1,027,282 206,669
Acquired research and development, net of accumulated
amortization.............................................. (359,851) (161,215)
--------- ---------
Balance under U.S. GAAP..................................... 667,431 45,454
========= =========
2000 1999
$ $
-------- --------
OTHER ASSETS, NET
Balance under Canadian GAAP................................. 11,311 4,219
Deferred financing costs on Debentures, net of
accumulated amortization.................................. 10,869 --
------ -----
Balance under U.S. GAAP..................................... 22,180 4,219
====== =====
2000 1999
$ $
-------- --------
DEFERRED REVENUE
Balance under Canadian GAAP................................. 54,234 48,462
Elimination of effect of retroactive change in accounting
policy for revenue recognition............................ -- (43,500)
------ -------
Balance under U.S. GAAP..................................... 54,234 4,962
====== =======
F-39
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
24. U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
2000 1999
$ $
-------- --------
FUTURE/DEFERRED INCOME TAXES
Balance under Canadian GAAP................................. 52,033 --
Recognition of tax consequences on acquired research and
development............................................... (55,598) --
Reversal of future tax liability on acquired research and
development............................................... 3,565 --
------- ----
Balance under U.S. GAAP..................................... -- --
======= ====
2000 1999
$ $
-------- --------
CONVERTIBLE SUBORDINATED PREFERRED EQUIVALENT DEBENTURES
Balance under Canadian GAAP................................. 301,297 --
Accretion of principal and interest components.............. (28,290) --
Interest paid............................................... 15,750 --
Financing costs............................................. 11,228 --
------- ----
Balance under U.S. GAAP..................................... 299,985 --
======= ====
2000 1999
$ $
-------- --------
SHAREHOLDERS' EQUITY
Balance under Canadian GAAP................................. 839,110 391,794
Reclassification of Debentures to long-term liabilities..... (301,297) --
Current year net income adjustments......................... (229,139) (161,058)
Cumulative prior year net income adjustments................ (135,839) 25,219
Effect of change in accounting policy for income taxes...... 51,848 --
Cumulative compensation cost of employee stock options...... 12,167 12,167
Collection of warrant subscription receivable............... 8,244 5,957
Value of consideration on acquisition of Fuisz.............. (6,743) (6,743)
Unrealized holding loss on long-term investments............ (893) --
-------- --------
Balance under U.S. GAAP..................................... 237,458 267,336
======== ========
F-40
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
24. U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
(c) COMPONENTS OF SHAREHOLDERS' EQUITY
2000 1999
$ $
-------- --------
Common shares............................................... 482,842 363,579
Stock options outstanding................................... 9,891 10,383
Warrants.................................................... 7,912 8,244
Warrant subscription receivable............................. -- (2,287)
Deficit..................................................... (261,819) (113,843)
Accumulated other comprehensive income (loss)............... (1,368) 1,260
-------- --------
Total shareholders' equity under U.S. GAAP.................. 237,458 267,336
======== ========
(d) RECONCILIATION OF NET INCOME (LOSS)
2000 1999 1998
$ $ $
-------- -------- --------
Net income attributable to common shareholders under
Canadian GAAP............................................. 81,163 51,080 31,419
U.S. GAAP ADJUSTMENTS
Acquired research and development, net of amortization...... (198,636) (161,215) --
Reclassification of premium paid on early extinguishment of
Senior Notes to extraordinary item........................ 20,039 -- --
Accretion of principal and interest components of
Debentures................................................ 12,540 -- --
Settlement of Fuisz pre-acquisition contract................ 7,460 -- --
Reversal of future tax liability on acquired research and
development............................................... (3,565) -- --
Collection of warrant subscription receivable............... (2,287) (4,028) (1,179)
Adjustment to amortization of goodwill...................... (792) -- --
Amortization of deferred financing costs on Debentures...... (359) -- --
Elimination of effect of retroactive change in accounting
policy for revenue recognition............................ -- 11,400 14,000
Compensation cost for employee stock options................ -- (7,641) (2,237)
Reversal (write-off) of product launch advertising costs.... -- 426 (426)
-------- -------- -------
(165,600) (161,058) (10,158)
-------- -------- -------
F-41
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
24. U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
2000 1999 1998
$ $ $
-------- -------- --------
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle under
U.S. GAAP................................................. (84,437) (109,978) 41,577
Extraordinary item.......................................... (20,039) -- --
Cumulative effect of change in accounting principle......... (43,500) -- --
-------- -------- ------
Net income (loss) under U.S. GAAP........................... (147,976) (109,978) 41,577
======== ======== ======
2000 1999 1998
$ $ $
-------- -------- --------
BASIC EARNINGS (LOSS) PER SHARE UNDER U.S. GAAP
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle under
U.S. GAAP................................................. (0.66) (1.07) 0.39
Extraordinary item.......................................... (0.16) -- --
Cumulative effect of change in accounting principle......... (0.34) -- --
----- ----- ----
Net income (loss) under U.S. GAAP........................... (1.16) (1.07) 0.39
===== ===== ====
DILUTED EARNINGS (LOSS) PER SHARE UNDER U.S. GAAP
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle under
U.S. GAAP................................................. (0.66) (1.07) 0.38
Extraordinary item.......................................... (0.16) -- --
Cumulative effect of change in accounting principle......... (0.34) -- --
----- ----- ----
Net income (loss) under U.S. GAAP........................... (1.16) (1.07) 0.38
===== ===== ====
(e) COMPREHENSIVE INCOME (LOSS)
Under U.S. GAAP, the following additional disclosure would be provided
pursuant to the requirements of SFAS No. 130, "Reporting Comprehensive
Income" which established standards for the reporting of comprehensive
income and its components.
F-42
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
24. U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
STATEMENT OF COMPREHENSIVE INCOME (LOSS)
2000 1999 1998
$ $ $
-------- -------- --------
Net income (loss) under U.S. GAAP........................... (147,976) (109,978) 41,577
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustment..................... (1,735) 2,489 (269)
Unrealized holding loss on long-term investments............ (893) -- (877)
Reclassification adjustment for gain on long-term
investments included in net loss.......................... -- 877 --
-------- -------- ------
Other comprehensive income (loss)........................... (2,628) 3,366 (1,146)
-------- -------- ------
Comprehensive income (loss)................................. (150,604) (106,612) 40,431
======== ======== ======
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BALANCES
2000
------------------------------------
FOREIGN UNREALIZED
CURRENCY LOSS ON
TRANSLATION INVESTMENTS TOTAL
$ $ $
----------- ----------- --------
Balance, beginning of year.................................. 1,260 -- 1,260
Changes during the year..................................... (1,735) (893) (2,628)
------ ---- ------
Balance, end of year........................................ (475) (893) (1,368)
====== ==== ======
1999
------------------------------------
FOREIGN UNREALIZED
CURRENCY LOSS ON
TRANSLATION INVESTMENTS TOTAL
$ $ $
----------- ----------- --------
Balance, beginning of year.................................. (1,229) (877) (2,106)
Changes during the year..................................... 2,489 877 3,366
------ ---- ------
Balance, end of year........................................ 1,260 -- 1,260
====== ==== ======
F-43
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
24. U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
(f) CASH FLOW ADJUSTMENTS
2000 1999 1998
$ $ $
-------- -------- --------
OPERATING ACTIVITIES
Balance under Canadian GAAP................................. 113,071 81,013 53,573
Interest paid on Debentures................................. (15,750) -- --
Settlement of Fuisz pre-acquisition contract................ 7,460 -- --
Collection of warrant subscription receivable............... (2,287) (4,028) (1,179)
Acquired product right...................................... -- (25,000) --
------- ------- ------
Balance under U.S. GAAP..................................... 102,494 51,985 52,394
======= ======= ======
2000 1999 1998
$ $ $
-------- -------- --------
INVESTING ACTIVITIES
Balance under Canadian GAAP................................. (574,843) (129,393) (32,953)
Settlement of Fuisz pre-acquisition contract................ (7,460) -- --
Acquired product right...................................... -- 25,000 --
-------- -------- -------
Balance under U.S. GAAP..................................... (582,303) (104,393) (32,953)
======== ======== =======
2000 1999 1998
$ $ $
-------- -------- --------
FINANCING ACTIVITIES
Balance under Canadian GAAP................................. 409,017 147,916 49,493
Interest paid on Debentures................................. 15,750 -- --
Collection of warrant subscription receivable............... 2,287 4,028 1,179
------- ------- ------
Balance under U.S. GAAP..................................... 427,054 151,944 50,672
======= ======= ======
(g) INCOME TAXES
Under U.S. GAAP, the components of the provision for income taxes are as
follows:
2000 1999 1998
$ $ $
-------- -------- --------
Current..................................................... 5,610 4,215 2,024
Deferred.................................................... 3,750 -- --
----- ----- -----
9,360 4,215 2,024
===== ===== =====
F-44
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
24. U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
The reported provision for income taxes differs from the expected amount
calculated by applying the Company's Canadian statutory rate to income
(loss) before provision for income taxes under U.S. GAAP. The reasons for
this difference and the related tax effects are as follows:
2000 1999 1998
$ $ $
-------- -------- --------
Income (loss) before provision for income taxes............. (75,077) (105,763) 43,601
Expected Canadian statutory rate............................ 44.39% 44.81% 44.81%
------- -------- -------
Expected provision for (recovery of) income taxes........... (33,327) (47,392) 19,538
Non-deductible amounts
Acquired research and development......................... 92,519 47,311 --
Goodwill amortization..................................... 1,265 904 91
Compensation cost for employee stock options.............. 205 3,434 1,002
Equity loss............................................... -- 26,169 --
Foreign tax rate differences................................ (58,379) (35,120) (22,442)
Unrecognized income tax benefit of losses................... 5,922 7,983 3,545
Other....................................................... 1,155 926 290
------- -------- -------
9,360 4,215 2,024
======= ======== =======
Under U.S. GAAP, deferred income taxes have been provided on the following
temporary differences:
2000 1999
$ $
-------- --------
Deferred tax assets
Tax loss carryforwards.................................... 39,837 29,644
Scientific Research and Experimental Development pool..... 16,664 14,960
Investment tax credits.................................... 11,180 9,824
Deferred financing costs.................................. 9,320 4,347
Other..................................................... 4,963 --
------- -------
Total deferred tax assets................................... 81,964 58,775
Valuation allowance on deferred tax assets.................. (43,250) (53,741)
------- -------
Net deferred tax assets..................................... 38,714 5,034
------- -------
Deferred tax liabilities
Intangible assets......................................... 38,714 5,034
------- -------
Net deferred income taxes................................... -- --
======= =======
(h) STOCK OPTIONS
Under U.S. GAAP, the Company accounts for compensation expense for certain
members of the Plan under the provisions of APB No. 25. Had compensation
cost for the Plan been determined based upon fair value at the grant date
for awards under this plan consistent with the methodology prescribed under
SFAS No. 123, "Accounting for Stock-Based Compensation", the Company's net
income (loss) and earnings (loss) per share would have changed to the pro
forma amounts indicated below:
2000 1999 1998
$ $ $
-------- -------- --------
Net income (loss) as reported under U.S. GAAP............... (147,976) (109,978) 41,577
Estimated stock-based compensation costs.................... 16,680 7,534 5,264
-------- -------- ------
Pro forma net income (loss)................................. (164,656) (117,512) 36,313
======== ======== ======
Pro forma earnings (loss) per share......................... (1.28) (1.15) 0.34
======== ======== ======
F-45
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES AND PER
SHARE DATA)
(AMOUNTS AS AT DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS THEN ENDED ARE
RESTATED -- SEE NOTE 3)
24. U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
The fair values of all options granted during 2000, 1999 and 1998 were
estimated as of the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions:
2000 1999 1998
-------- -------- --------
Expected option life (years)................................ 4.2 3.8 4.0
Volatility (%).............................................. 41.1 49.1 47.6
Risk-free interest rate (%)................................. 5.8 5.7 5.5
The Black-Scholes model, used by the Company to calculate option values, as
well as other currently accepted option valuation models, were developed to
estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the Company's
stock option awards. These models also require highly subjective
assumptions, including future stock price volatility and expected time until
exercise, which greatly affect the calculated values. Accordingly,
management believes that these models do not necessarily provide a reliable
single measure of the fair value of the Company's stock option awards.
(i) NEW ACCOUNTING STANDARD
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS No. 137 and
SFAS No. 138. Accordingly, SFAS No. 133 will be effective for the Company's
financial statements beginning January 1, 2001. SFAS No. 133 requires a
company to recognize all derivative instruments as assets or liabilities in
its balance sheet and to measure them at fair value. The Company believes
the adoption of SFAS No. 133 will not result in any cumulative effect
adjustment in the consolidated statements of income (loss).
25. COMPARATIVE FIGURES
Certain of the prior years' figures have been reclassified to the
presentation adopted in the current year.
F-46
BIOVAIL CORPORATION
AUDITORS' REPORT
To the Board of Directors of Biovail Corporation
We have audited the consolidated balance sheets of BIOVAIL CORPORATION as at
December 31, 2000 and 1999 and the consolidated statements of loss,
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian and United States
generally accepted auditing standards. Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
2000 and 1999 and the results of its operations and its cash flows for the years
then ended in accordance with United States generally accepted accounting
principles.
As discussed in note 3 to the consolidated financial statements, during 2000
the Company changed its method of accounting for revenue recognition.
On February 26, 2001, we reported separately to the Board of Directors and
shareholders of BIOVAIL CORPORATION on the financial statements for the same
periods, prepared in accordance with Canadian generally accepted accounting
principles.
Toronto, Canada /s/ ERNST & YOUNG LLP
February 26, 2001 Chartered Accountants
F-47
BIOVAIL CORPORATION
CONSOLIDATED BALANCE SHEETS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
AS AT DECEMBER 31
----------------------
2000 1999
---------- ---------
ASSETS
CURRENT
Cash and cash equivalents (note 5).......................... $ 125,144 $ 178,086
Restricted cash............................................. -- 11,258
Short-term investments...................................... -- 54,635
Accounts receivable (note 6)................................ 105,850 60,571
Inventories (note 7)........................................ 24,108 12,701
Assets held for disposal (note 4)........................... -- 20,000
Deposits and prepaid expenses............................... 5,347 3,172
---------- ---------
260,449 340,423
---------- ---------
Long-term investments (note 8).............................. 1,561 12
Property, plant and equipment, net (note 9)................. 52,541 45,300
Goodwill, net (note 10)..................................... 103,105 31,771
Intangible assets, net (note 11)............................ 667,431 45,454
Other assets, net (note 12)................................. 22,180 4,219
---------- ---------
$1,107,267 $ 467,179
========== =========
LIABILITIES
CURRENT
Accounts payable............................................ $ 34,683 $ 22,685
Accrued liabilities (note 13)............................... 35,452 31,107
Income taxes payable........................................ 6,711 3,585
Deferred revenue............................................ 26,334 4,962
Current portion of long-term obligations (note 14).......... 182,564 12,016
---------- ---------
285,744 74,355
---------- ---------
Deferred revenue............................................ 27,900 --
Long-term obligations (note 14)............................. 256,180 125,488
Convertible Subordinated Preferred Equivalent Debentures
(note 15)................................................. 299,985 --
---------- ---------
869,809 199,843
---------- ---------
Shareholders' Equity
Common shares, no par value, unlimited shares authorized,
131,461,000 and 124,392,000 ]issued and outstanding at
December 31, 2000 and 1999, respectively (note 16)........ 482,842 363,579
Stock options outstanding................................... 9,891 10,383
Warrants (note 16).......................................... 7,912 8,244
Warrant subscription receivable (note 16)................... -- (2,287)
Deficit..................................................... (261,819) (113,843)
Accumulated other comprehensive income (loss)............... (1,368) 1,260
---------- ---------
237,458 267,336
---------- ---------
$1,107,267 $ 467,179
========== =========
Commitments and contingencies (notes 19 and 21)
On behalf of the Board:
/s/ EUGENE N. MELNYK /s/ BRUCE D. BRYDON
Eugene N. Melnyk Bruce D. Brydon
Chairman of the Board Director and Chief Executive Officer
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-48
BIOVAIL CORPORATION
CONSOLIDATED STATEMENTS OF LOSS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE
DATA)
YEARS ENDED DECEMBER 31
-----------------------
2000 1999
---------- ----------
REVENUE
Product sales............................................... $ 224,996 $ 99,526
Research and development.................................... 66,834 48,232
Royalty and licensing....................................... 17,340 24,706
--------- ---------
309,170 172,464
--------- ---------
EXPENSES
Cost of goods sold (note 21)................................ 68,031 35,078
Research and development.................................... 52,659 33,130
Selling, general and administrative (note 21)............... 58,088 38,727
Acquired research and development (note 4).................. 208,424 105,689
--------- ---------
387,202 212,624
--------- ---------
Operating loss.............................................. (78,032) (40,160)
Interest income (expense), net (notes 14 and 15)............ 2,955 (9,152)
Equity loss (note 4)........................................ -- (58,399)
Gain on disposal of long-term investments, net (note 8)..... -- 1,948
--------- ---------
Loss before provision for income taxes...................... (75,077) (105,763)
Provision for income taxes (note 17)........................ 9,360 4,215
--------- ---------
Loss before extraordinary item and cumulative effect of
change in accounting principle............................ (84,437) (109,978)
Extraordinary item -- Premium paid on early extinguishment
on U.S. Dollar Senior Notes (note 14)..................... (20,039) --
--------- ---------
Loss before cumulative effect of change in accounting
principle................................................. (104,476) (109,978)
Cumulative effect of change in accounting principle (note
3)........................................................ (43,500) --
--------- ---------
Net loss.................................................... $(147,976) $(109,978)
========= =========
BASIC AND DILUTED LOSS PER SHARE (note 18)
Loss before extraordinary item and cumulative effect of
change in accounting principle............................ $ (0.66) $ (1.07)
Extraordinary item.......................................... (0.16) --
Cumulative effect of change in accounting principle......... (0.34) --
--------- ---------
Net loss.................................................... $ (1.16) $ (1.07)
========= =========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (000S) (note 18)
Basic....................................................... 128,824 102,542
Diluted..................................................... 143,512 108,174
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-49
BIOVAIL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
COMMON SHARES ACCUMULATED
------------------- STOCK WARRANT RETAINED OTHER
SHARES OPTIONS SUBSCRIPTION EARNINGS COMPREHENSIVE
(000S) AMOUNT OUTSTANDING WARRANTS RECEIVABLE (DEFICIT) INCOME (LOSS)
-------- -------- ------------- ---------- ------------- ---------- ----------------
Balance, December 31,
1998...................... 99,444 21,394 2,560 8,244 (6,315) 26,111 (2,106)
Issued on the exercise of
options................... 1,336 8,467 (838) -- -- -- --
Issued under Employee Stock
Purchase Plan............. 6 40 -- -- -- -- --
Cancelled under stock
repurchase program........ (2,931) (617) -- -- -- (29,976) --
Issued pursuant to equity
offering.................. 20,360 259,590 -- -- -- -- --
Issue costs................. -- (13,538) -- -- -- -- --
Fuisz Technologies Ltd.:
Issued on acquisition..... 6,177 88,243 -- -- -- -- --
Issue of non-employee
options................. -- -- 1,020 -- -- -- --
Compensation cost for
employee stock options.... -- -- 7,641 -- -- -- --
Collection of warrant
subscription receivable... -- -- -- -- 4,028 -- --
------- -------- ------- ------ ------ --------- -------
124,392 363,579 10,383 8,244 (2,287) (3,865) (2,106)
------- -------- ------- ------ ------ --------- -------
Net loss.................... -- -- -- -- -- (109,978) --
OTHER COMPREHENSIVE INCOME
Foreign currency translation
adjustment................ -- -- -- -- -- -- 2,489
Reclassification adjustment
for gain on long-term
investments included in
net loss.................. -- -- -- -- -- -- 877
------- -------- ------- ------ ------ --------- -------
Other comprehensive income.. -- -- -- -- -- -- 3,366
------- -------- ------- ------ ------ --------- -------
Comprehensive loss.......... -- -- -- -- -- -- --
------- -------- ------- ------ ------ --------- -------
Balance, December 31,
1999...................... 124,392 363,579 10,383 8,244 (2,287) (113,843) 1,260
Issued on the exercise of
options................... 2,436 17,027 (3,302) -- -- -- --
Issued under Employee Stock
Purchase Plan............. 5 150 -- -- -- -- --
Issued pursuant to equity
offering.................. 4,000 101,125 -- -- -- -- --
Issue costs................. -- (5,782) -- -- -- -- --
Issued on conversion of
Convertible Subordinated
Preferred Equivalent
Debentures................ -- 15 -- -- -- -- --
Issued on exercise of
warrants.................. 601 6,342 -- (332) -- -- --
Issue of non-employee
options................... -- -- 590 -- -- -- --
Additional shares issued on
acquisition of Fuisz
Technologies Ltd.......... 27 386 -- -- -- -- --
TOTAL
---------
Balance, December 31,
1998...................... 49,888
Issued on the exercise of
options................... 7,629
Issued under Employee Stock
Purchase Plan............. 40
Cancelled under stock
repurchase program........ (30,593)
Issued pursuant to equity
offering.................. 259,590
Issue costs................. (13,538)
Fuisz Technologies Ltd.:
Issued on acquisition..... 88,243
Issue of non-employee
options................. 1,020
Compensation cost for
employee stock options.... 7,641
Collection of warrant
subscription receivable... 4,028
---------
373,948
---------
Net loss.................... (109,978)
OTHER COMPREHENSIVE INCOME
Foreign currency translation
adjustment................ 2,489
Reclassification adjustment
for gain on long-term
investments included in
net loss.................. 877
---------
Other comprehensive income.. 3,366
---------
Comprehensive loss.......... (106,612)
---------
Balance, December 31,
1999...................... 267,336
Issued on the exercise of
options................... 13,725
Issued under Employee Stock
Purchase Plan............. 150
Issued pursuant to equity
offering.................. 101,125
Issue costs................. (5,782)
Issued on conversion of
Convertible Subordinated
Preferred Equivalent
Debentures................ 15
Issued on exercise of
warrants.................. 6,010
Issue of non-employee
options................... 590
Additional shares issued on
acquisition of Fuisz
Technologies Ltd.......... 386
F-50
BIOVAIL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
COMMON SHARES ACCUMULATED
------------------- STOCK WARRANT RETAINED OTHER
SHARES OPTIONS SUBSCRIPTION EARNINGS COMPREHENSIVE
(000S) AMOUNT OUTSTANDING WARRANTS RECEIVABLE (DEFICIT) INCOME (LOSS)
-------- -------- ------------- ---------- ------------- ---------- ----------------
DJ Pharma, Inc.:
Fair value of unvested
options granted to
employees on
acquisition............. -- -- 7,480 -- -- -- --
Unearned compensation
relating to future
service period at
acquisition date........ -- -- (5,721) -- -- -- --
Compensation cost for
employee stock
options................. -- -- 461 -- -- -- --
Collection of warrant
subscription receivable... -- -- -- -- 2,287 -- --
------- -------- ------- ------ ------ --------- -------
131,461 482,842 9,891 7,912 -- (113,843) 1,260
------- -------- ------- ------ ------ --------- -------
Net loss.................... -- -- -- -- -- (147,976) --
OTHER COMPREHENSIVE LOSS
Foreign currency translation
adjustment................ -- -- -- -- -- -- (1,735)
Unrealized holding loss on
long-term investments..... -- -- -- -- -- -- (893)
------- -------- ------- ------ ------ --------- -------
Other comprehensive loss.... -- -- -- -- -- -- (2,628)
------- -------- ------- ------ ------ --------- -------
Comprehensive loss.......... -- -- -- -- -- -- --
------- -------- ------- ------ ------ --------- -------
BALANCE, DECEMBER 31,
2000...................... 131,461 $482,842 $ 9,891 $7,912 $-- $(261,819) $(1,368)
======= ======== ======= ====== ====== ========= =======
TOTAL
---------
DJ Pharma, Inc.:
Fair value of unvested
options granted to
employees on
acquisition............. 7,480
Unearned compensation
relating to future
service period at
acquisition date........ (5,721)
Compensation cost for
employee stock
options................. 461
Collection of warrant
subscription receivable... 2,287
---------
388,062
---------
Net loss.................... (147,976)
OTHER COMPREHENSIVE LOSS
Foreign currency translation
adjustment................ (1,735)
Unrealized holding loss on
long-term investments..... (893)
---------
Other comprehensive loss.... (2,628)
---------
Comprehensive loss.......... (150,604)
---------
BALANCE, DECEMBER 31,
2000...................... $ 237,458
=========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-51
BIOVAIL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
YEARS ENDED DECEMBER 31
-----------------------
2000 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(147,976) $(109,978)
Depreciation and amortization............................... 21,526 8,885
Deferred income taxes (note 17)............................. 3,750 --
Acquired research and development (note 4).................. 208,424 80,689
Extraordinary item (note 14)................................ 20,039 --
Cumulative effect of change in accounting principle (note
3)........................................................ 43,500 --
Compensation cost for employee stock options................ 461 7,641
Equity loss (note 4)........................................ -- 58,399
Gain on disposal of long-term investments, net (note 8)..... -- (1,948)
--------- ---------
149,724 43,688
Net change in non-cash operating items (note 20)............ (47,230) 8,297
--------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES....................... 102,494 51,985
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment, net............. (15,845) (7,759)
Acquisition of businesses, net of cash acquired (notes 4 and
20)....................................................... (622,145) (43,720)
Proceeds from sale of assets held for disposal (note 4)..... 20,000 --
Maturity of (additions to) short-term investments, net...... 65,893 (54,665)
Acquisition of product rights............................... (27,752) (13,340)
Disposal (acquisition) of long-term investments (note 8).... (2,454) 11,991
Repayment of Executive Stock Purchase Plan loans............ -- 3,100
--------- ---------
Cash used in investing activities........................... (582,303) (104,393)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common shares (note 16)......................... 109,604 253,721
Repurchase of common shares (note 16)....................... -- (30,593)
Proceeds from exercise of warrants (note 16)................ 6,010 --
Collection of warrant subscription receivable (note 16)..... 2,287 4,028
Issuance of Convertible Subordinated Preferred Equivalent
Debentures, net of financing costs (note 15).............. 288,772 --
Advances under revolving term credit facility, net of
financing costs (note 14)................................. 207,000 --
Repurchase of U.S. Dollar Senior Notes (note 14)............ (141,017) --
Reduction in other long-term obligations.................... (45,602) (75,212)
--------- ---------
CASH PROVIDED BY FINANCING ACTIVITIES....................... 427,054 151,944
--------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... (187) 271
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (52,942) 99,807
Cash and cash equivalents, beginning of year................ 178,086 78,279
--------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 125,144 $ 178,086
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-52
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 1 GOVERNING STATUTE AND NATURE OF OPERATIONS
Biovail Corporation ("Biovail" or the "Company") is incorporated under the
laws of the Province of Ontario, Canada. The Company is a fully integrated
international pharmaceutical company applying advanced proprietary
controlled-release drug delivery technology to the development of superior
branded and cost effective generic formulations of medications for the
treatment of chronic medical conditions. The Company is engaged in all
stages of pharmaceutical development, from research and development, through
clinical testing and regulatory filings to full-scale manufacturing. The
Company's common shares trade on the New York and Toronto Stock Exchanges.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements have been prepared by the Company in
U.S. dollars and in accordance with U.S. generally accepted accounting
principles ("GAAP"), applied on a consistent basis. Prior to the current
fiscal year, the Company reported its consolidated results in accordance
with Canadian GAAP. Consolidated financial statements prepared in U.S.
dollars and in accordance with Canadian GAAP are made available to all
shareholders and filed with various regulatory authorities.
The decision to provide U.S. GAAP consolidated financial results was driven
by the Company's desire to make it easier for the majority of its
shareholders to assess the Company's financial performance by using
accounting rules that are more familiar to these shareholders. This
presentation is also consistent with the presentation of financial results
of most of the Company's industry customers and competitors.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and those of all its subsidiaries. All significant intercompany transactions
and balances have been eliminated.
USE OF ESTIMATES
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 consolidated financial statements and the
reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from these estimates. Significant estimates made
by management include the calculation of reserves for uncollectible
accounts, sales returns, allowances and rebates, useful lives of long-lived
assets, including intangibles, and the realizability of deferred tax assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of all financial assets and liabilities, other than
the Convertible Subordinated Preferred Equivalent Debentures and U.S. Dollar
Senior Notes, approximates their carrying values at December 31, 2000 and
1999. Fair value of a financial instrument is defined as the amount at which
the instrument could be exchanged in a current transaction between willing
parties.
CASH AND CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less when purchased. Cash equivalents are
carried at cost, which approximates fair value.
Short-term investments are classified as held-to-maturity in accordance with
the Financial Accounting Standards Board ("FASB"), Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments
in Debt and Equity Securities", and are carried at cost, which approximates
fair value. Short-term investments include highly liquid investments with
original maturities greater than three months but less than one year when
purchased. Short-term investments generally consist of high-grade commercial
paper and U.S. government treasury bills.
Realized gains and losses on cash equivalents and short-term investments are
included in the net loss, and are immaterial for both periods presented.
F-53
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are comprised of raw materials, work in process and finished
goods, which are valued at the lower of cost and replacement cost, on a
first-in, first-out basis. The costs of raw materials and acquired finished
goods inventories are the purchase price of the product and attributable
direct costs, less trade discounts. The cost of manufactured inventory
includes the purchase price of raw materials, direct labour, and the
application of attributable overheads.
LONG-TERM INVESTMENTS
Long-term investments are generally classified as available-for-sale in
accordance with SFAS No. 115. Accordingly, long-term investments are
reported at fair value and the change in the net unrealized gains and losses
on these investments is included in other comprehensive income (loss) in
shareholders' equity.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are reported at cost, less accumulated
depreciation. Depreciation is computed using the straight-line method based
on the following estimated useful lives:
Buildings........................................ 25 years
Machinery and equipment.......................... 5-10 years
Other equipment.................................. 3-5 years
Leasehold improvements........................... term of lease
GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets are reported at cost, less accumulated
amortization. Amortization is computed using the straight-line method based
on the following estimated useful lives:
Goodwill......................................... 20 years
Workforce........................................ 6-10 years
Core technology.................................. 15 years
Brand names...................................... 20 years
Product rights and royalty interests............. 10-20 years
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company
reviews long-lived identifiable assets and related goodwill for impairment
whenever events or changes in circumstance indicate that the carrying amount
of the assets may not be recoverable by comparing the carrying amount to the
related, estimated undiscounted future net cash flows.
OTHER ASSETS
Other assets include deferred financing costs, which are reported at cost,
less accumulated amortization. Deferred financing costs are amortized over
the term of the following related debt:
Revolving term credit facility................... 3 years
Convertible Subordinated Preferred
Equivalent Debentures............................ 25 years
Amortization expense related to deferred financing costs is included as a
component of interest expense.
INCOME TAXES
The liability method of accounting for income taxes is used in accordance
with SFAS No. 109, "Accounting for Income Taxes". Under this method,
deferred tax assets and liabilities are recognized for the differences
between the financial statement and income tax bases of assets and
liabilities, and for operating losses and tax credit carryforwards. A
valuation allowance is provided for the portion of deferred tax assets which
are "more-likely-than-not" to be unrealized. Deferred tax assets and
liabilities are measured using the enacted tax rates and laws.
F-54
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
PRODUCT SALES -- Product sales revenue is recognized when the product is
shipped to the customer, provided the Company has not retained any
significant risks of ownership or future obligations with respect to the
product shipped. Revenue from product sales is recognized net of sales
discounts, allowances and amounts payable to licensors. In certain
circumstances the Company allows customers to return or exchange products.
In accordance with SFAS No. 48, "Revenue Recognition When Right of Return
Exists", the Company maintains provisions for estimated product returns or
exchanges. Amounts received from customers as prepayments for products to be
shipped in the future are reported as deferred revenue. When the products
are shipped at a future date, they are billed to the customer at the
contractual rate.
RESEARCH AND DEVELOPMENT -- Research and development revenue attributable to
the performance of contract services is recognized as the services are
performed, in accordance with the terms of the specific development
contract. On long-term research and development arrangements, revenue is
recognized relative to the total level of effort necessary to meet all
regulatory and developmental requirements. Costs and related profit margin
in excess of amounts billed are included in accounts receivable. Amounts
billed in excess of costs and related profit margin are included in deferred
revenue. 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.
ROYALTY AND LICENSING -- Royalty revenue is recognized on an accrual basis
in accordance with the contractual agreements, and when the Company has no
future obligations pursuant to the royalty fee. Royalty revenue is net of
amounts payable to sublicensees where the Company is simply acting as an
agent for the sublicensee. 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.
RESEARCH AND DEVELOPMENT
In accordance with SFAS No. 2, "Accounting for Research and Development
Costs", research and development costs are expensed in the period in which
they are incurred. Acquired research and development having no alternative
future use is written-off at the time of acquisition. The cost of
intangibles that are purchased from others for a particular research and
development project that have no alternative future use are written-off at
the time of acquisition.
ADVERTISING COSTS
Advertising and promotion costs related to new product launches are expensed
upon the first showing of the product. Advertising expense for 2000 and 1999
was $3,434,000 and $4,955,000, respectively.
REPORTING CURRENCY AND FOREIGN CURRENCY TRANSLATIONS
The Company reports its consolidated financial statements in U.S. dollars.
The financial statements of the parent company and its non-U.S. subsidiaries
are translated into U.S. dollars in accordance with SFAS No. 52, "Foreign
Currency Translation". Asset and liability accounts are translated at the
rate of exchange prevailing at the balance sheet date. Shareholders' equity
accounts are translated at the applicable historical rate. Revenue and
expense accounts are translated at the average rate of exchange for the
period. The cumulative foreign currency translation adjustment is reported
as a component of accumulated other comprehensive income (loss) in
shareholders' equity. The net change in the cumulative foreign currency
translation adjustment in the periods presented is primarily due to
fluctuations in the exchange rates between the Company's reporting currency
and the Canadian dollar, Irish pound and Swiss franc.
Foreign currency transaction gains and losses are included in the net loss,
and are immaterial for both periods presented.
STOCK OPTION PLAN
Under the provisions of SFAS No. 123, "Accounting for Stock Compensation",
companies can either measure the compensation cost of equity instruments
issued under employee compensation plans using a fair value based method or
can continue to recognize compensation cost using the intrinsic value method
under the provisions of Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees". However, if the provisions of
APB No. 25 are applied, pro forma disclosure of net income (loss) and
earnings (loss) per share must be presented in the financial statements as
if the fair value method had been applied. For both
F-55
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
periods presented, the Company recognized compensation costs under the
provisions of APB No. 25, and the Company has provided the expanded
disclosure required by SFAS No. 123.
NEW ACCOUNTING STANDARD
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS No. 137 and SFAS
No. 138. Accordingly, SFAS No. 133 will be effective for the Company's
consolidated financial statements beginning January 1, 2001. SFAS No. 133
requires a company to recognize all derivative instruments as assets or
liabilities in its balance sheet and to measure them at fair value. The
Company believes the adoption of SFAS No. 133 will not result in any
cumulative effect adjustment in the consolidated statements of loss.
NOTE 3 CHANGE IN ACCOUNTING PRINCIPLE
The Company implemented the provisions of the Securities and Exchange
Commission's, Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements", retroactively to January 1, 2000, as
required. Accordingly, the Company changed its method of accounting to that
described in the revenue recognition accounting policy 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 period. Of
this amount, $9,300,000 is included in revenue for the period. The remaining
cumulative effect adjustment has been recorded as deferred revenue.
Amounts as reported in the consolidated statements of loss are as follows:
1999
---------
Net loss.................................................... $(109,978)
Basic and diluted loss per share............................ $ (1.07)
Pro forma amounts assuming the change in accounting principle was applied
retroactively with restatement are as follows:
1999
---------
Net loss.................................................... $(121,378)
Basic and diluted loss per share............................ $ (1.18)
F-56
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 4 ACQUISITIONS
2000 ACQUISITIONS
During 2000, the Company completed the acquisitions of Intelligent Polymers
Limited, the Cardizem-Registered Trademark- product line and
DJ Pharma, Inc. These acquisitions were accounted for under the purchase
method of accounting. Total consideration, including acquisition costs, was
allocated based on estimated fair values on the respective dates of
acquisition, as follows:
INTELLIGENT
POLYMERS CARDIZEM-REGISTERED TRADEMARK- DJ PHARMA,
LIMITED PRODUCTS INC. TOTAL
----------- ------------------------------ ----------- --------
Acquired research and development..................... $208,424 -- $ $ -- $208,424
Current assets........................................ 3,287 -- 14,705 17,992
Equipment............................................. -- -- 672 672
Deferred compensation trust fund...................... -- -- 8,268 8,268
Assembled workforce................................... -- -- 5,200 5,200
Brand names and product rights........................ 5,000 406,070 130,500 541,570
Goodwill.............................................. -- -- 70,497 70,497
Current liabilities................................... (14,270) -- (22,844) (37,114)
Deferred compensation obligation...................... -- -- (8,268) (8,268)
Debt assumed.......................................... -- -- (34,169) (34,169)
-------- -------- -------- --------
$202,441 $406,070 $164,561 $773,072
======== ======== ======== ========
CONSIDERATION
Cash paid, net of cash acquired....................... $202,441 $239,652 $162,802 $604,895
Issue of non-employee options......................... -- 590 -- 590
Fair value of options granted to employees............ -- -- 1,759 1,759
Accrued acquisition costs............................. -- 4,000 -- 4,000
Aventis obligation.................................... -- 161,828 -- 161,828
-------- -------- -------- --------
$202,441 $406,070 $164,561 $773,072
======== ======== ======== ========
INTELLIGENT POLYMERS LIMITED
BACKGROUND
In July 1997, Intelligent Polymers Limited, a Bermuda corporation
("Intelligent Polymers") was formed primarily to develop once-daily
controlled-release branded versions of selected drugs whose chemical patents
and/or exclusivity periods had or were about to expire and which were
marketed only in immediate-release form or in controlled-release form
requiring multiple daily dosing.
In September 1997, the Company concluded a development and license agreement
(the "Development Contract") and a services agreement with Intelligent
Polymers, whereby the Company would develop the designated products on
Intelligent Polymers' behalf.
In an initial public offering in October 1997, 3,737,500 units of
Intelligent Polymers were sold to the public, resulting in net proceeds to
Intelligent Polymers, after offering costs, of approximately $69,500,000.
The proceeds of the offering were used by Intelligent Polymers to make
payments to the Company under the Development Contract.
Payments received by the Company from Intelligent Polymers pursuant to the
Development Contract were $55,200,000 for the period ended September 29,
2000, and $33,000,000 for the year ended December 31, 1999. The cost of
providing these services to Intelligent Polymers was $35,200,000 for the
period ended September 29, 2000, and $19,800,000 for the year ended
December 31, 1999.
In December 1999, the Company exercised its option to acquire the rights to
the generic version of Procardia XL, developed on behalf of Intelligent
Polymers, for $25,000,000. The right to Procardia XL was written-off as
acquired research and development in 1999 since at the time of acquisition
the product had not received regulatory approval from the FDA, and had no
alternative future use.
The Company, as the holder of all of the issued and outstanding special
shares of Intelligent Polymers, had an option, exercisable at its sole
discretion, to purchase all, but not less than all, of the outstanding
common shares of Intelligent Polymers commencing on the closing date of the
offering and ending on the earlier of September 30, 2002, or the 90th day
after the date Intelligent Polymers provided
F-57
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 4 ACQUISITIONS (CONTINUED)
the Company with quarterly financial statements showing cash or cash
equivalents of less than $3,000,000. If the purchase option had been
exercised, the purchase price calculated on a per share basis would have
been as follows:
PURCHASE OPTION
EXERCISE PRICE
---------------
Before October 1, 2000...................................... $39.06
On or after October 1, 2000 and on or before September 30,
2001...................................................... 48.83
On or after October 1, 2001 and on or before September 30,
2002...................................................... $61.04
DESCRIPTION OF ACQUISITION
On September 29, 2000, the Company sold all of its interest in and to the
special shares of Intelligent Polymers to IPL Acquireco 2000 Ltd., a British
Virgin Islands company ("IPL Acquireco"), in exchange for 12,000 non-voting
common shares of IPL Acquireco, valued at $12,000. In addition, the Company
invested $141,500,000 in non-voting Class A shares of IPL Acquireco. On the
same date, IPL Acquireco, as holder of the special shares of Intelligent
Polymers, consummated the purchase of all the issued and outstanding common
shares of Intelligent Polymers and thereby Intelligent Polymers became a
wholly-owned subsidiary of IPL Acquireco. As a result of IPL Acquireco's
acquisition of Intelligent Polymers, certain provisions of the Development
Contract were amended such that Intelligent Polymers took over the
development of the designated products, including directly contracting with,
and making payments to, third parties.
The Company, as holder of all of the non-voting common shares of IPL
Acquireco, had the option, exercisable at its sole discretion, to purchase
all of the voting common shares of IPL Acquireco, at any time prior to
October 1, 2002. IPL Acquireco had 6,500,000 voting common shares issued and
outstanding.
On December 29, 2000, the Company exercised its option to purchase all the
voting common shares of IPL Acquireco for a total redemption price of
$6,750,000. Contemporaneously with the acquisition of IPL Acquireco, the
Company repaid the bank credit facility of Intelligent Polymers, which
amounted to $56,616,000. Accordingly, the total consideration for the
acquisition of IPL Acquireco, including the value of the Class A and special
shares, was $204,878,000. The assets, liabilities and expenses of IPL
Acquireco and Intelligent Polymers have been included in these consolidated
financial statements from December 29, 2000.
ACQUIRED RESEARCH AND DEVELOPMENT
At the date of acquisition, the products under development were in various
stages of completion, had not reached technological feasibility, had no
known alternative uses, and were considered to be in-process research and
development. The efforts required to develop the acquired research and
development into commercially viable products include the completion of the
development stages of the products, clinical-trial testing, U.S. Federal
Drug Administration ("FDA") approval, and commercialization. The principal
risks relating to the products in development are the outcomes of the
formulation development, clinical studies and regulatory filings. At the
date of acquisition, none of the products had been submitted for approval
with the FDA. Since pharmaceutical products cannot be marketed without
regulatory approvals, the Company will not receive any benefits unless
regulatory approval is obtained.
INTANGIBLE ASSET
Intelligent Polymers had acquired as part of its development activities the
rights to a cardiovascular product. This product right has been included in
the value of the net liabilities of Intelligent Polymers assumed, and will
be amortized over its estimated useful life.
PRO FORMA INFORMATION
The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company, IPL Acquireco and
Intelligent Polymers as if the acquisition had occurred on January 1, 1999.
Included in the consolidated results for 1999 is
F-58
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 4 ACQUISITIONS (CONTINUED)
the write-off of acquired research and development. All transactions between
the Company and Intelligent Polymers have been eliminated.
2000 1999
-------- ---------
Total revenue............................................... $255,946 $ 143,492
Net loss.................................................... (13,171) (345,391)
Basic and diluted loss per share............................ $ (0.10) $ (3.37)
These unaudited pro forma consolidated results have been prepared for
comparative purposes only. They do not purport to be indicative of the
results of operations which actually would have resulted had IPL Acquireco
and Intelligent Polymers been included in the Company's consolidated
financial statements from January 1, 1999. In addition, they do not purport
to be indicative of future consolidated results of operations of the
Company.
CARDIZEM-REGISTERED TRADEMARK- PRODUCTS
DESCRIPTION OF ACQUISITION
On December 28, 2000, the Company acquired the North American rights to the
Cardizem-Registered Trademark- product line (the
"Cardizem-Registered Trademark- Products") from Aventis
Pharmaceuticals, Inc. and its affiliates ("Aventis").
Cardizem-Registered Trademark- is a leading calcium channel blocker
prescribed for the treatment of hypertension and angina. The Company
acquired all the intangible assets associated with the products including
the patents, regulatory files, trademarks, manufacturing know-how,
copyrights and other intellectual property. The Company obtained the
beneficial rights to and the interest in the Cardizem-Registered Trademark-
Products effective December 31, 2000, and will obtain full legal rights and
title on December 31, 2001, following the completion of the payments
described below.
The purchase price for the Cardizem-Registered Trademark- Products was
$409,500,000 in cash comprised of an initial payment of $239,500,000, and
the balance of $170,000,000 payable equally over the four quarters of 2001.
In accordance with APB No. 21, "Interest on Receivables and Payables", the
remaining payments have been present valued based on an imputed interest
rate of approximately 8%, which was comparable to the Company's available
borrowing rate as at the date of the transaction. Accordingly, the present
value of the remaining payments was determined to be $161,828,000, resulting
in a discount of $8,172,000. The total discounted purchase price was
$406,070,000, including costs of acquisition of $4,742,000, which has been
allocated entirely to intangible assets. The intangible assets will be
amortized over their estimated useful lives of twenty years.
MANUFACTURING AND TRANSITIONAL SERVICES AGREEMENTS
In connection with the acquisition, the Company entered into manufacturing
and transitional services agreements with Aventis under which Aventis will
continue to manufacture, supply and provide distribution services for
specified periods to the Company for the Cardizem-Registered Trademark-
Products. The terms of these agreements are summarized as follows:
Aventis will manufacture and package, or cause another party to manufacture
and package, the Cardizem-Registered Trademark- Products for sale by the
Company. The term of the agreement is from January 1, 2001 to December 31,
2003, with a right to extend the term at the Company's option, subject to
certain conditions, if by the end of the term the Company is unable to
successfully manufacture the Cardizem-Registered Trademark- Products on its
own behalf, or is unable to reach an agreement with a second source
supplier. In addition to the manufacturing supply price, the Company agreed
to pay additional consideration under the manufacturing agreement of
$5,000,000, $3,000,000 and $2,000,000 on January 2, 2001, 2002 and 2003,
respectively.
Aventis has agreed to reimburse the Company for transitional expenses
incurred by the Company including general and administrative, manufacturing,
inventory write-offs, and sales and marketing expenses related to the
Cardizem-Registered Trademark- Products. The reimbursements are limited to
$11,000,000 and $10,000,000 for transitional expenses incurred in the two
calendar quarters ending June 30, 2001 and December 31, 2001, respectively.
PRO FORMA INFORMATION
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company including the contribution
from the Cardizem-Registered Trademark- Products as if the acquisition had
occurred on January 1, 1999. The contribution includes only direct expenses
related to the Cardizem-Registered Trademark- Products and, as such, does
not include any allocation of indirect selling, general and administrative
expenses. A full year of amortization, and interest expense on advances
under the revolving term credit facility, are included in the
F-59
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 4 ACQUISITIONS (CONTINUED)
consolidated results of both periods presented. Included in the consolidated
results of 1999 is the amortization of the imputed interest on the Aventis
obligation.
2000 1999
-------- --------
Total revenue............................................... $567,325 $819,964
Net income.................................................. 2,254 306,266
Basic earnings per share.................................... 0.02 2.99
Diluted earnings per share.................................. $ 0.02 $ 2.83
These unaudited pro forma consolidated results have been prepared for
comparative purposes only. They do not purport to be indicative of the
results of operations which actually would have resulted had the
contribution from the Cardizem-Registered Trademark- Products been included
in the Company's consolidated financial statements from January 1, 1999. In
addition, they do not purport to be indicative of future consolidated
results of operations of the Company.
DJ PHARMA, INC. (RENAMED BIOVAIL PHARMACEUTICALS INC.)
DESCRIPTION OF ACQUISITION
On October 6, 2000, the Company acquired DJ Pharma, Inc. ("DJ Pharma"), for
$165,127,000, including costs of acquisition of $868,000 and the fair value
of unvested DJ Pharma employee stock options. In accordance with FASB
Interpretation ("FIN") No. 44, "Accounting for Certain Transactions
Involving Stock Compensation," the total fair value of the unvested options
granted to employees of DJ Pharma was determined to be $7,480,000, of which
$1,759,000 was allocated to the purchase price, and $5,721,000 was allocated
to deferred compensation, based on the ratios of the past and future service
periods divided by the total service period, respectively. The assets,
liabilities, revenue and expenses of DJ Pharma have been included in the
consolidated financial statements of the Company from October 6, 2000.
DJ Pharma was organized to market and sell patented and branded generic
prescription pharmaceutical products for the treatment of respiratory and
allergy conditions, and for skin and soft tissue infections. DJ Pharma
obtained the rights to certain products from Dura Pharmaceuticals, Inc. and
one of its subsidiaries ("Dura"). The products obtained from Dura include a
patented broad-spectrum antibiotic ("Keftab") used primarily for the
treatment of respiratory and skin infections developed by Eli Lilly &
Company; a line of prescription cough, cold and allergy branded generic
products ("Dura-Vent") developed by Dura; and a line of prescription cough,
cold and allergy branded generic products ("Rondec") developed by Abbot
Laboratories. DJ Pharma also had the exclusive rights to sell and market
Schering Corporation's ("Schering") antibiotic Cedax in the United States.
Cedax is an antibiotic indicated for the treatment of chronic bronchitis,
middle ear infection and tonsillitis.
DJ Pharma had an assembled workforce mainly involved in the sales and
marketing of its products.
ASSEMBLED WORKFORCE
At the acquisition date, the Company obtained the services of approximately
300 DJ Pharma employees, consisting primarily of sales account managers and
representatives. The assembled workforce was fair valued using a cost
approach, and is estimated to have a useful life of six years.
PRODUCT RIGHTS
At the acquisition date, DJ Pharma had various purchase, licensing and
supply agreements covering branded products and product families such as
Keftab, Dura-Vent, Rondec and Cedax. These contracts provide the Company
with a stream of identifiable benefits resulting from the sale of these
products. Under the agreement with Dura, DJ Pharma obtained exclusive rights
to Keftab, Dura-Vent and Rondec through to December 31, 2002, in return for
payment of certain license fees based on a percentage of net sales, subject
to annual maximums (the "Dura Agreement"). At the expiration of the Dura
Agreement, DJ Pharma obtains Dura's rights to Dura-Vent worldwide, and its
rights to Rondec and Keftab within the United States. Under the agreement
with Schering, DJ Pharma obtained the co-exclusive right to market Cedax in
the United States. At the termination of the agreement, all rights to the
product revert back to Schering. The products under the license agreements
were valued using an income approach, based on the present value of the
incremental revenue and corresponding cash flow that could be lost in the
absence of these contracts. The discount rate used was an after-tax
market-derived rate of 18%. The fair value of the Keftab, Dura-Vent and
Rondec products was determined to be $96,500,000,
F-60
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 4 ACQUISITIONS (CONTINUED)
with estimated useful lives of twenty years. The fair value of the Cedax
product was determined to be $34,000,000, with an estimated useful life of
ten years, based on the remaining term of the Schering agreement.
DEFERRED COMPENSATION
DJ Pharma initiated an Executive Deferred Compensation Plan to provide
certain employees with the opportunity to supplement their retirement income
through the deferral of pre-tax income. The initial funding of the plan was
through compensation deferrals by the plan participants. Those funds,
totalling $8,268,000, were placed in trust and invested to purchase life
insurance policies (recorded at the cash surrender value) in the names of
each participant. The terms of the trust agreement state that the assets of
the trust are available to satisfy the claims of general creditors of the
company in the event of bankruptcy, thereby qualifying the trust as a rabbi
trust for income tax purposes. In accordance with Emerging Issues Task Force
Issue ("EITF") 97-14, "Accounting for Deferred Compensation Arrangements
Where Amounts Earned Are Held in a Rabbi Trust and Invested", the assets of
the trust have been consolidated with the accounts of the employer in the
financial statements of the employer, with a corresponding amount recorded
as a deferred compensation obligation. Changes in the value of the assets
held by the trust are recorded in earnings each period, with a corresponding
charge (or credit) to compensation expense, to reflect the fair value of the
amount owed to the participants.
SUBSEQUENT TRANSACTION
On December 27, 2000, DJ Pharma and Dura agreed to amend certain provisions
of the Dura Agreement, with the effect that the second closing date under
the agreement was accelerated from December 31, 2002. Consequently,
DJ Pharma obtained the ownership to the Dura-Vent and Rondec product lines,
including the trademarks, regulatory history, formulations, manufacturing
know-how and marketing information, and the assignment of Dura's license
rights to the Keftab product line, as of the amendment date. In
consideration, DJ Pharma agreed to make the maximum remaining license
payments under the Dura Agreement, and to settle the promissory note payable
and the product acquisition notes payable to Dura, plus accrued interest to
the amendment date. The remaining maximum license payments amounted to
$19,800,000 and have been capitalized to product rights, and the settlement
of the principal plus interest due under the notes amounted to $28,100,000.
PRO FORMA INFORMATION
The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company and DJ Pharma as if the
acquisition had occurred on January 1, 1999. A full year of amortization is
included in the consolidated results of both periods presented.
2000 1999
--------- ---------
Total revenue............................................... $ 341,382 $ 209,645
Net loss.................................................... (158,081) (114,208)
Basic and diluted loss per share............................ $ (1.23) $ (1.11)
These unaudited pro forma consolidated results have been prepared for
comparative purposes only. They do not purport to be indicative of the
results of operations which actually would have resulted had DJ Pharma been
included in the Company's consolidated financial statements from January 1,
1999. In addition, they do not purport to be indicative of future
consolidated results of operations of the Company.
1999 ACQUISITION
FUISZ TECHNOLOGIES LTD. (RENAMED BIOVAIL TECHNOLOGIES LTD.)
DESCRIPTION OF ACQUISITION
On November 12, 1999, the Company completed the acquisition of Fuisz
Technologies Ltd. ("Fuisz") for $171,154,000 including costs relating to the
acquisition. Fuisz is an international company that is engaged in the
development, manufacturing and commercialization of a wide range of drug
delivery, nutraceutical and food ingredient products utilizing its
proprietary CEFORM-Registered Trademark-, SHEARFORM-Registered Trademark-
and other drug delivery technologies (the "Fuisz Technology").
F-61
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 4 ACQUISITIONS (CONTINUED)
Fuisz was acquired through a series of transactions which began in
July 1999 with the purchase of certain Fuisz common stock and the
announcement on July 25, 1999 that the Company had entered into a merger
agreement to acquire the remaining common stock of Fuisz in a two-stage
transaction consisting of a cash tender offer and a stock-for-stock merger.
By September 4, 1999, the Company had completed the acquisition of 49% of
Fuisz's outstanding common stock for cash consideration of $75,565,000
pursuant to the cash tender offer and other purchase transactions. On
November 12, 1999, Biovail acquired the remaining common stock of Fuisz by
issuing 6,176,620 common shares of the Company, with a fair value of
$88,243,000. The value of the common shares issued by the Company was
determined by reference to the average market price of the Company's common
shares before and after the date of the merger agreement on July 25, 1999.
PURCHASE PRICE ALLOCATION
The Company accounted for the acquisition of Fuisz as a step acquisition
using the purchase method of accounting. The Company has recognized in these
consolidated financial statements its 49% equity interest in the results of
Fuisz for the period from September 4, 1999, the date it acquired
significant influence, to November 12, 1999, the date of acquisition of
control. The equity loss for this period amounted to $58,399,000, and
includes the Company's proportionate share of acquired research and
development. The assets, liabilities, revenue and expenses of Fuisz have
been included in these consolidated financial statements from November 12,
1999.
The purchase price of $171,154,000, which includes acquisition costs of
$7,346,000, was allocated as follows:
Acquired research and development........................... $137,470
Current assets.............................................. 60,617
Assets held for disposal.................................... 20,000
Buildings and equipment..................................... 16,893
Intangible assets........................................... 358
Workforce................................................... 2,041
Core technology............................................. 11,185
Goodwill.................................................... 30,481
Current liabilities......................................... (21,820)
Debt assumed................................................ (86,071)
--------
Purchase price.............................................. $171,154
========
Included in the provision for restructuring costs related to the acquisition
of Fuisz, established by the Company at the date of acquisition, was
$10,000,000 for the settlement of a pre-acquisition contract. The settlement
of this contract was a contingency that existed prior to the acquisition of
Fuisz, and the amount of the provision was based on the information
available to the Company at that time in accordance with SFAS No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises". The
provision was included in the determination of the net assets of Fuisz
acquired. During 2000, the Company entered into a final settlement of this
preacquisition contract.
During 2000, the Company issued 27,000 additional common shares in relation
to the acquisition of Fuisz with a fair value of $386,000. The cash
settlement of the contract and the issuance of additional common shares
resulted in an additional charge of $7,460,000 that has been allocated to
goodwill acquired.
ACQUIRED RESEARCH AND DEVELOPMENT
The Fuisz Technology involves drug delivery platforms and the application of
such platforms to specific product development programs. At the date of
acquisition, Fuisz was involved in seventeen product development projects
for a number of pharmaceutical companies which were in various stages of
completion. With the exception of certain nutraceutical products, the Fuisz
Technology had not been employed in any product which had received
regulatory approval to date and was considered to have no alternative future
use other than for the therapeutic indications for which it was in
development or which may be developed. Accordingly, technological
feasibility of the products related to the Fuisz Technology was not
established at the acquisition date and was considered to be in-process
research and development.
F-62
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 4 ACQUISITIONS (CONTINUED)
Two of the projects had been submitted for approval with the applicable
regulatory authorities. One project was submitted to the FDA in June 1998
and the other was submitted to the Medical Control Agency in the U.K.
("MCA") in April 1998. The remaining fifteen projects were expected to be
completed in accordance with Fuisz's contractual obligations with the
relevant customers over the next eighteen months.
The development projects were estimated to be 65% complete on average,
estimated peak sales were approximately $942,000,000 per annum, estimated
costs to completion of these products were approximately $9,500,000 and a
discount rate of 28% was used. The average time to full completion of the
remaining work for the projects in development was estimated to be
approximately twelve months. The work remaining to complete the products in
development involved on-going formulation, bioequivalency, safety and
efficacy studies and the submission of regulatory filings to seek marketing
approvals. The principal risks relating to the acquired technology were the
outcomes of such clinical trials and Biovail's ability to negotiate
acceptable commercial terms with the pharmaceutical companies developing the
products. As pharmaceutical products cannot be marketed without regulatory
approvals, the Company will not receive any benefits unless regulatory
approval is obtained.
In April 2000, one of the products under development at the acquisition date
received approval from the MCA. The product, a rapid dissolve form of
ibuprofen, represented the first commercial introduction of a product
utilizing the Fuisz Technology.
ASSETS HELD FOR DISPOSAL
The Company determined, as part of its evaluation of the purchase of Fuisz,
that certain operations of Fuisz were not strategic to Biovail's business
plans and accordingly should be sold.
Prior to the completion of the stock exchange, on October 22, 1999, Fuisz
agreed to sell all of the issued shares of three of its wholly-owned
European subsidiaries for proceeds of $28,700,000. Further, Fuisz agreed to
assign all of the rights, privileges and advantages from its Cebutid
trademark to the purchaser of its European subsidiaries for proceeds of
$10,273,000. No gain or loss was recognized by the Company on these
transactions as these subsidiaries were included in the purchase price
allocation at their fair value when Biovail acquired its 49% interest in
Fuisz.
On December 1, 1999, with an effective date of January 4, 2000, the Company
entered into an agreement to sell all of the issued share capital of Clonmel
Healthcare Limited ("Clonmel"), a pharmaceutical and antibiotic manufacturer
and distributor located in Ireland, for proceeds of $20,000,000. The Company
recognized no gain or loss on this transaction as Clonmel was included at
its fair value in the purchase price allocation on November 12, 1999.
Under the terms of the sale of Clonmel, the Company repaid an IRL8,452,000
term bank loan connected with the 1997 acquisition of Clonmel by Fuisz,
utilizing the restricted cash balance of $11,258,000 that was pledged as
collateral against the term bank loan at December 31, 1999.
PRO FORMA INFORMATION
The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company and Fuisz as if the
acquisition, disposals and repayment of convertible subordinated debentures
had occurred on January 1, 1998. A full year of goodwill amortization and
interest costs is included for both periods presented. Included in the
consolidated results for 1998 is the write-off of acquired research and
development.
1999 1998
-------- ---------
Total revenue............................................... $184,390 $ 124,656
Net loss.................................................... (5,186) (135,236)
Basic and diluted loss per share............................ $ (0.05) $ (1.17)
======== =========
These unaudited pro forma consolidated results have been prepared for
comparative purposes only. They do not purport to be indicative of the
results of operations which actually would have resulted had Fuisz been
included in the Company's consolidated financial statements from January 1,
1998. In addition, they do not purport to be indicative of future
consolidated results of operations of the Company.
F-63
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 5 CASH AND CASH EQUIVALENTS
2000 1999
-------- --------
Cash and bank certificates of deposit....................... $ 65,784 $ 38,776
Money market funds and corporate debt securities............ 59,360 139,310
-------- --------
$125,144 $178,086
======== ========
NOTE 6 ACCOUNTS RECEIVABLE
2000 1999
-------- --------
Trade (net of allowance for doubtful accounts of $4,049,000
and $3,255,000 for 2000 and 1999, respectively)........... $ 98,442 $ 50,458
Royalties................................................... 3,565 3,176
Other....................................................... 3,843 6,937
-------- --------
$105,850 $ 60,571
======== ========
The Company performs ongoing credit evaluations of customers and generally
does not require collateral. Allowances are maintained for potential credit
losses. Three customers accounted for 61% and 82% of trade and royalties
receivable at December 31, 2000 and 1999, respectively. The Company believes
that there is no unusual exposure associated with the collection of these
receivables.
NOTE 7 INVENTORIES
2000 1999
-------- --------
Raw materials............................................... $ 7,140 $ 5,149
Work in process............................................. 5,079 4,258
Finished goods.............................................. 11,889 3,294
------- -------
$24,108 $12,701
======= =======
NOTE 8 LONG-TERM INVESTMENTS
2000 1999
-------- --------
Investment in Hemispherx Biopharma, Inc..................... $1,357 $--
Other securities............................................ 204 --
Investment in Intelligent Polymers.......................... -- 12
------ ------
$1,561 $ 12
====== ======
In February 2000, the Company invested $2,250,000 in common shares of
Hemispherx Biopharma, Inc. ("Hemispherx"). The investment represents
approximately 1% of the outstanding common shares of Hemispherx and has been
classified as being available-for-sale. The fair value of the investment at
December 31, 2000 was $1,357,000.
In September 2000, the 12,000 special shares of Intelligent Polymers,
acquired by the Company in 1997, were sold to IPL Acquireco.
During 1999, the Company sold certain long-term investments, which had been
acquired in 1998, for a net gain of $1,948,000.
F-64
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 9 PROPERTY, PLANT AND EQUIPMENT
2000 1999
----------------------- -----------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
-------- ------------ -------- ------------
Land........................................................ $ 4,419 $-- $ 1,270 $--
Buildings................................................... 19,489 4,553 17,423 3,724
Machinery and equipment..................................... 30,054 10,701 24,914 7,366
Other equipment and leasehold improvements.................. 20,233 6,400 15,873 3,090
------- ------- ------- -------
74,195 21,654 59,480 14,180
Less accumulated depreciation............................... 21,654 14,180
------- -------
$52,541 $45,300
======= =======
Depreciation expense amounted to $8,096,000 and $4,138,000 in 2000 and 1999,
respectively.
NOTE 10 GOODWILL
2000 1999
-------- --------
Cost........................................................ $109,408 $35,310
Less accumulated amortization............................... 6,303 3,539
-------- -------
$103,105 $31,771
======== =======
Amortization expense amounted to $2,850,000 and $2,018,000 in 2000 and 1999,
respectively.
NOTE 11 INTANGIBLE ASSETS
2000 1999
-------- --------
Workforce................................................... $ 7,241 $ 2,041
Core technology............................................. 11,185 11,185
Brand names, product rights and royalty interests
Cardizem-Registered Trademark- Products..................... 406,070 --
Keftab, Dura-Vent, Rondec and Cedax......................... 154,089 --
Adalat Product.............................................. 64,720 9,000
Tiazac-Registered Trademark-................................ 15,000 15,000
Other....................................................... 22,217 11,602
-------- -------
680,522 48,828
Less accumulated amortization............................... 13,091 3,374
-------- -------
$667,431 $45,454
======== =======
Amortization expense amounted to $10,042,000 and $2,031,000 in 2000 and
1999, respectively.
ADALAT PRODUCT
On October 4, 1999, Biovail and Elan Corporation, plc ("Elan") entered into
a licensing and supply agreement, whereby Biovail obtained a license to
distribute Elan's generic version of Adalat CC 30mg dosage (the "Adalat
Product"), in exchange for royalties based on a percentage of sales. The
Company first launched the Adalat Product in March 2000. Elan manufactures
and supplies the Adalat Product to Biovail.
On December 29, 2000, Biovail and Elan agreed to certain amendments to the
licensing and supply agreement (the "Amended Agreement"), effective
January 1, 2000. The initial term of the Amended Agreement is fifteen years
from the date of first commercial sale. Under the terms of the Amended
Agreement, Biovail will pay to Elan annual minimum license payments,
exclusive of the direct manufacturing cost of the Adalat Product purchased
from Elan.
F-65
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 11 INTANGIBLE ASSETS (CONTINUED)
The minimum license payments have been capitalized as a product right, with
a corresponding long-term obligation to Elan. In accordance with APB
No. 21, the value assigned to the product right and obligation was the
present value of the minimum license payments based on an imputed interest
rate of approximately 8%, which was comparable to the Company's available
borrowing rate as at the date of the transaction. Accordingly, the present
value of the minimum license payments was determined to be $64,720,000
resulting in a discount of $8,780,000. The product right will be amortized
over its estimated useful life, which is the remaining initial term of the
Amended Agreement. At the end of the initial term, the Amended Agreement
continues automatically for subsequent two-year periods, unless terminated
by either party.
NOTE 12 OTHER ASSETS
2000 1999
-------- --------
Deferred financing costs.................................... $14,228 $5,024
Less accumulated amortization............................... 359 805
------- ------
13,869 4,219
Deferred compensation trust fund............................ 8,311 --
------- ------
$22,180 $4,219
======= ======
Amortization expense related to deferred financing costs amounted to
$538,000 and $698,000 in 2000 and 1999, respectively.
NOTE 13 ACCRUED LIABILITIES
2000 1999
-------- --------
Accrued product returns, rebates and chargebacks............ $16,895 $ 798
Employee costs.............................................. 5,696 4,528
Provision for restructuring costs........................... 3,482 13,597
Royalties................................................... 3,355 1,331
Professional fees........................................... 2,438 2,163
Interest.................................................... 426 1,736
Product rights.............................................. -- 1,524
Other....................................................... 3,160 5,430
------- -------
$35,452 $31,107
======= =======
At December 31, 2000, the provision for restructuring costs comprises
$1,602,000 related to the acquisition of DJ Pharma, and $1,880,000
(1999 -- $13,597,000) related to the acquisition of Fuisz. These costs were
included in the determination of the net assets of DJ Pharma and Fuisz
acquired, respectively.
At December 31, 2000, the provision for restructuring costs related to the
acquisition of DJ Pharma consists of employee costs of $1,362,000 and
$240,000 of other costs.
F-66
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 13 ACCRUED LIABILITIES (CONTINUED)
At December 31, 2000, the provision for restructuring costs related to the
acquisition of Fuisz consists of $1,000,000 (1999 -- $11,250,000) for the
settlement of contracts, $880,000 (1999 -- $1,303,000) for the termination
of employees and nil (1999 -- $1,044,000) of other costs. The reduction in
the provisions was substantially the result of cash payments made during
2000.
NOTE 14 LONG-TERM OBLIGATIONS
2000 1999
-------- --------
Revolving term credit facility (i).......................... $210,000 $ --
Aventis obligation (ii)..................................... 161,828 --
Elan obligation (iii)....................................... 58,090 --
Deferred compensation....................................... 8,311 --
Non-interest bearing government loan (iv)................... 470 1,250
U.S. Dollar Senior Notes (v)................................ -- 125,000
Term bank loan (vi)......................................... -- 10,799
Other debt.................................................. 45 455
-------- --------
438,744 137,504
Less current portion........................................ 182,564 12,016
-------- --------
$256,180 $125,488
======== ========
(i) REVOLVING TERM CREDIT FACILITY
On December 27, 2000, the Company entered into a definitive agreement
with The Bank of Nova Scotia (the "Bank") for a revolving term
$300,000,000 Senior Secured Credit Facility (the "Credit Facility"). The
Credit Facility is fully underwritten by the Bank in anticipation of
syndication to the Bank and other financial institutions (the "Lenders")
who may commit to a portion of the Credit Facility. The Credit Facility
is revolving in nature for the initial term of 364 days, and may be
extended at the request of the Company and at the sole discretion of the
Lenders for additional periods of up to 364 days. If the Lenders elect
not to extend the revolving period of the Credit Facility, the Company
may elect to convert amounts then outstanding to a non-revolving facility
with a final maturity date two years from the then current revolving
period maturity date. In this event, advances shall be repaid by equal
quarterly instalments through the term period. Accordingly, the Credit
Facility has been classified as a long-term obligation.
Borrowings under the Credit Facility are secured by a charge over
substantially all of the assets and undertakings, including intellectual
property, of the Company. The credit agreement includes certain financial
and non-financial covenants. The financial covenants require the Company
to meet or exceed certain minimum thresholds for shareholders' equity and
interest coverage, and not to exceed a maximum threshold in respect of
the ratio of debt to earnings before interest, taxes, depreciation and
amortization. Non-financial covenants include, but are not limited to,
restrictions on acquisition, capital and debt restructuring related
activity exceeding established thresholds. Upon a change in control, the
holder of the Credit Facility has the right to require the Company to
settle the entire Credit Facility, plus accrued and unpaid interest at
the date of settlement.
Borrowings may be by way of U.S. dollar London Interbank Offering Rate
("LIBOR") or U.S. Base Rate advances or Canadian dollar Prime Rate or
Bankers' Acceptance ("BA") advances. Interest is charged at the Bank's
quoted rate plus a borrowing margin of 1.375% to 2% in the case of LIBOR
and BA advances, and 0.375% to 1% in the case of Base Rate and Prime Rate
advances, depending on the Company's credit rating at the time of such
borrowing. The effective rate of interest at December 31, 2000 was 8.84%.
(ii) AVENTIS OBLIGATION
The Aventis obligation of $170,000,000 was assumed on the acquisition of
the Cardizem-Registered Trademark- Products. The obligation, which is
non-interest bearing, has been discounted by $8,172,000, based on an
imputed interest rate of approximately 8%. The obligation is payable in
quarterly instalments of $42,500,000 on March 30, June 29, September 28
and December 28, 2001.
F-67
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 14 LONG-TERM OBLIGATIONS (CONTINUED)
(iii) ELAN OBLIGATION
The Elan obligation of $73,500,000 reflects the minimum license payments
assumed under the Amended Agreement for the Adalat Product. The
obligation, which is non-interest bearing, has been discounted by
$8,780,000 based on an imputed interest rate of approximately 8%. The
first installment of $17,500,000, which is payable on January 5, 2001,
has been recorded net of $6,630,000 due to the Company from Elan. The
remaining installments are payable quarterly in the following gross
annual amounts: 2001 -- $16,000,000; 2002 -- $14,000,000;
2003 -- $10,000,000; 2004 -- $8,000,000; and 2005 -- $8,000,000.
(iv) NON-INTEREST BEARING GOVERNMENT LOAN
The non-interest bearing government loan is payable to Western Economic
Diversification, a Canadian federal government agency. The final payment
is due in 2001.
(v) U.S. DOLLAR SENIOR NOTES
Issued under an indenture dated November 16, 1998, the U.S. Dollar Senior
Notes (the "Senior Notes") were general unsecured senior obligations,
which bore interest at 10 7/8%, payable semi-annually in arrears on May
15 and November 15 of each year. The Senior Notes were due to mature on
November 15, 2005.
At December 31, 1999, the fair value of the Senior Notes was
$128,388,000.
In March 2000, the Company repurchased all of its outstanding notes at a
redemption price of 112.820% of the principal amount, plus accrued
interest. The premium paid by the Company of $16,017,000 consisted of a
consent payment of $2,500,000 and a premium of $13,517,000 calculated by
reference to the bid price and yield on March 6, 2000 for the 5 3/4% U.S.
Treasury Note due on November 20, 2002. In accordance with SFAS No. 4,
"Reporting Gains and Losses From Extinguishment of Debt", the premium
paid together with the unamortized deferred financing costs on the notes,
which amounted to $4,022,000, are reported as an extraordinary item in
the consolidated statements of income (loss).
(vi) TERM BANK LOAN
The term bank loan of IRL8,452,000 bore interest at the bank's reference
rate plus margin (aggregate rate of 4.13% at December 31, 1999). The loan
was collateralized by a restricted cash balance of $11,258,000, which was
used to repay the loan in January 2000.
INTEREST
Interest expense on long-term obligations amounted to $3,059,000 and
$13,594,000 for the years ended December 31, 2000 and 1999, respectively.
PRINCIPAL REPAYMENTS
Principal repayments on long-term obligations for the years ending
December 31, are as follows:
2001........................................................ $182,564
2002........................................................ 116,835
2003........................................................ 114,219
2004........................................................ 7,388
2005........................................................ 7,466
2006........................................................ 1,961
Thereafter.................................................. 8,311
--------
$438,744
========
F-68
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 15 CONVERTIBLE SUBORDINATED PREFERRED EQUIVALENT DEBENTURES
DESCRIPTION
The Company issued under an indenture dated March 22, 2000, 6,000,000
Convertible Subordinated Preferred Equivalent Debentures, due on March 31,
2025 (the "Debentures") for gross proceeds of $300,000,000. After deducting
financing costs of $11,228,000, the net proceeds from the issue amounted to
$288,772,000. The Debentures are unsecured and subordinated to all senior
indebtedness, as defined, of the Company. At the holders' option, the
Debentures are convertible at any time into common shares of the Company at
$30.337 per common share. During 2000, 300 Debentures, with a face value of
$15,000, were converted into 494 common shares of the Company.
INTEREST
The Debentures bear interest at 6.75%, payable quarterly in arrears on
March 31, June 30, September 30 and December 31 of each year. Subject to
certain conditions, the Company has the right to defer payment of interest
on the Debentures for up to twenty consecutive quarterly periods. At the
option of the Company, the deferred interest may be paid using the proceeds
from the sale of common shares or other equity securities of the Company.
Interest expense on the Debentures amounted to $15,750,000 for the period
ended December 31, 2000.
OPTIONAL REDEMPTION
On or after March 31, 2003, the Company may, at its option, redeem in whole
or in part, the Debentures at the following prices, plus accrued and unpaid
interest, if redeemed during the twelve-month period commencing on March 31
of the years indicated:
REDEMPTION
PRICE
-----------
2003........................................................ 104.725%
2004........................................................ 104.050
2005........................................................ 103.375
2006........................................................ 102.700
2007........................................................ 102.025
2008........................................................ 101.350
2009........................................................ 100.675
2010 and thereafter......................................... 100.000
The principal and interest payable on any redemption date are payable in
cash by the Company, or at the option of the Company, may be paid using the
proceeds from the sale of common shares or other equity securities of the
Company.
SPECIAL REDEMPTION
At any time prior to March 31, 2003, other than during periods where the
Company has elected to defer the payment of interest, the Company may redeem
the Debentures at its option, in whole or in part, at 106.750% of the
principal amount plus accrued and unpaid interest, if the trading price of
the Company's common shares equals or exceeds $45.505 per share on the New
York Stock Exchange for 20 trading days within 30 consecutive trading days
ending one day prior to the day on which the Company sends out a special
redemption notice. If the Company undertakes a special redemption, the
holders of the Debentures called for redemption will receive an additional
payment in a amount equal to the present value of the aggregate amount of
the interest that would have thereafter been payable on the Debentures from
the special redemption date to March 31, 2003. The present value would be
calculated using the bond equivalent yield on U.S. Treasury notes or bills
having a term nearest in length to that of the additional period. The
Company would be obligated to make the additional payment on all the
Debentures called for special redemption, whether or not those Debentures
are converted into common shares prior to the special redemption date.
FAIR VALUE
At December 31, 2000, the fair value of the Debentures, based on the quoted
market price, was $428,979,000.
F-69
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 16 SHAREHOLDERS' EQUITY
AUTHORIZED AND ISSUED SHARES
STOCK SPLITS
In October 2000, pursuant to shareholders' consent received at the 2000
annual meeting, the Company's common shares split on a 2 for 1 basis. In
December 1999, the shareholders of the Company authorized a 2 for 1 stock
split, and an increase in authorized shares to an unlimited number of common
shares without par value.
All share and per share amounts in these consolidated financial statements
have been retroactively adjusted to give effect to the stock splits.
SHARE OFFERINGS
In March 2000, concurrent with the offering of the Debentures, the Company
completed a share offering by issuing 4,000,000 common shares for gross
proceeds of $101,125,000 less issue costs of $5,782,000.
In October 1999, the Company completed a share offering by issuing
20,360,000 common shares for gross proceeds of $259,590,000 less issue costs
of $13,538,000.
STOCK REPURCHASE PROGRAM
During 1998, the Company implemented a stock repurchase program under which
the Company was able to purchase up to 10% of its issued and outstanding
common shares. During 1999, 2,930,800 common shares were repurchased at a
cost of $30,593,000. The excess of the cost of the common shares acquired
over the stated capital thereof, totalling $29,976,000 was charged to
deficit. The program was terminated with no further common shares
repurchased.
STOCK OPTION PLAN
Under the Company's Stock Option Plan, as amended (the "Plan"), the Company
may grant to directors, officers, employees, consultants and advisors,
options to purchase common shares of the Company. The purpose of the Plan is
to provide long-term incentives and rewards to certain of the Company's
directors, officers, employees, consultants and advisors. The aggregate
number of shares reserved for issuance under the Plan, taking into
consideration the 2 for 1 stock splits completed in October 2000 and
December 1999, shall not exceed 28,000,000 common shares. The number of
shares reserved for issuance to any one person under the Plan, together with
shares which that person may acquire under any similar plan of the Company,
may not exceed 5% of the total issued and outstanding common shares. Under
the Plan, the Company designates the maximum number of shares that are
subject to an option. The exercise price per share of an option is the
closing market price at which the common shares are traded on the New York
Stock Exchange on the day prior to the date the option is granted, or if not
so traded, the average between the closing bid and ask prices thereof as
reported for that day.
The option vesting terms vary based on the type of option. Management
options granted prior to January 1, 1999 vest as to one-third each year
commencing on the first anniversary of the grant and will expire on a date
not later than five years from the date of the grant.
Option granted after January 1, 1999 vest as follows: Executive options vest
pursuant to the terms and conditions of the employment agreement; special
options vest on the second anniversary date of the grant; management options
vest as to one-fourth each year commencing on the first anniversary of the
grant and expire not later than seven years from the date of the grant.
F-70
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 16 SHAREHOLDERS' EQUITY (CONTINUED)
The following table summarizes the Company's stock option activity for the
three years ended December 31, 2000 taking into effect the 2 for 1 stock
splits in October 2000 and December 1999:
WEIGHTED
OPTIONS AVERAGE
(000S) EXERCISE PRICE
-------- --------------
Outstanding balance, December 31, 1998...................... 8,841 6.91
Granted..................................................... 3,369 18.57
Exercised................................................... (1,334) 5.72
Forfeited................................................... (429) 7.37
------- ------
Outstanding balance, December 31, 1999...................... 10,447 10.81
Granted..................................................... 2,345 27.06
Exercised................................................... (2,436) 5.79
Forfeited................................................... (307) 18.29
------- ------
Outstanding balance, December 31, 2000...................... 10,049 $15.58
======= ======
The following table summarizes the information about options outstanding at
December 31, 2000:
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES (000S) LIFE (YEARS) PRICE (000S) PRICE
------------------------ ----------- ------------ -------- ----------- --------
$2.96 - $3.13......................................... 240 2.7 $ 2.99 22 $ 2.55
5.00 - 7.50........................................... 391 1.2 6.79 291 6.73
7.58 - 10.50.......................................... 4,986 2.3 8.22 2,567 7.91
12.77 - 17.50......................................... 421 3.9 16.08 389 22.50
22.50 - 29.00......................................... 2,953 6.1 22.77 -- --
$36.00 - $38.84....................................... 1,058 7.0 36.10 -- --
------ ------ ----- ------
10,049 $15.58 3,269 $ 9.50
====== ====== ===== ======
The Company accounts for compensation expense for certain members of the
Plan under the provisions of APB No. 25. Had compensation cost for the Plan
been determined based upon fair value at the grant date for awards under
this plan consistent with the methodology prescribed under SFAS No. 123, the
Company's net loss and loss per share would have changed to the pro forma
amounts indicated below:
2000 1999
--------- ---------
Net loss as reported........................................ $(147,976) $(109,978)
Estimated stock-based compensation costs.................... 16,680 7,534
--------- ---------
Pro forma net loss.......................................... (164,656) (117,512)
--------- ---------
Pro forma loss per share.................................... $ (1.28) $ (1.15)
========= =========
The fair values of all options granted during 2000 and 1999 were estimated
as of the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions:
2000 1999
-------- --------
Expected option life (years)................................ $4.2 $3.8
Volatility.................................................. 41.1% 49.1%
Risk-free interest rate..................................... 5.8% 5.7%
===== =====
F-71
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 16 SHAREHOLDERS' EQUITY (CONTINUED)
The Black-Scholes model, used by the Company to calculate option values, as
well as other currently accepted option valuation models, were developed to
estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the Company's
stock option awards. These models also require highly subjective
assumptions, including future stock price volatility and expected time until
exercise, which greatly affect the calculated values. Accordingly,
management believes that these models do not necessarily provide a reliable
single measure of the fair value of the Company's stock option awards.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan ("EPP") was approved by the
shareholders at the Special Shareholders Meeting held on January 1, 1996 and
was established in 1996. The purpose of the EPP is to provide a convenient
method for full-time employees of the Company to participate in the share
ownership of the Company or to increase their share ownership in the Company
via payroll or contractual deduction. Directors, senior officers or insiders
of the Company are not eligible to participate in the EPP. The aggregate
number of shares reserved for issuance under the EPP, taking into
consideration the 2 for 1 stock splits in October 2000 and December 1999,
shall not exceed 1,200,000 common shares. At the discretion of a committee
of the Board of Directors that will administer the EPP, the Company may
issue directly from treasury or purchase shares in the market from time to
time to satisfy the obligations under the EPP. A participant may authorize
payroll or contractual deduction up to a maximum of 10% of the base salary
or remuneration to be received during any purchase period. The purchase
price shall be 90% of the fair market value per share of stock on the date
on which the eligible period ends.
WARRANTS
In October 1997, Intelligent Polymers completed a public offering of
3,737,500 units. Each unit comprised one common share of Intelligent
Polymers and one warrant to purchase four post-split common shares of the
Company. The net proceeds to Intelligent Polymers of the offering after
offering expenses amounted to approximately $69,500,000. On September 30,
1999, the units separated and the Intelligent Polymers' common shares and
the Company's warrants traded independently of each other. The warrants are
exercisable at a per share price of $10.00 from October 1, 1999 until
September 30, 2002.
In 1997, the Company recorded a credit to equity of $8,244,000 equal to the
proceeds attributable to the warrants included in the offering as determined
at the time of their issuance, along with an offsetting contra equity
account called "warrant subscription receivable". Payments received from
Intelligent Polymers, pursuant to the Development Agreement, were prorated
between research and development revenue and the warrant subscription
receivable.
During 2000, 150,250 warrants were exercised in exchange for 601,000 common
shares of the Company. The Company received proceeds on the exercise of
warrants of $6,010,000.
NOTE 17 INCOME TAXES
The components of the provision for income taxes are as follows:
2000 1999
-------- --------
Current..................................................... $5,610 $4,215
Deferred.................................................... 3,750 --
------ ------
$9,360 $4,215
====== ======
F-72
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 17 INCOME TAXES (CONTINUED)
The reported provision for income taxes differs from the expected amount
calculated by applying the Company's Canadian statutory rate to the loss
before provision for income taxes. The reasons for this difference and the
related tax effects are as follows:
2000 1999
-------- ---------
Loss before provision for income taxes...................... $(75,077) $(105,763)
Expected Canadian statutory rate............................ 44.39% 44.81%
-------- ---------
Expected recovery of income taxes........................... (33,327) (47,392
Non-deductible amounts
Acquired research and development........................... 92,519 47,311
Goodwill amortization....................................... 1,265 904
Compensation cost for employee stock options................ 205 3,434
Equity loss................................................. -- 26,169
Foreign tax rate differences................................ (58,379) (35,120)
Unrecognized income tax benefit of losses................... 5,922 7,983
Other....................................................... 1,155 926
-------- ---------
$ 9,360 $ 4,215
======== =========
The Company has provided for foreign withholding taxes on the portion of
undistributed earnings of foreign subsidiaries expected to be remitted.
Deferred income taxes have been provided on the following temporary
differences:
2000 1999
-------- --------
Deferred tax assets
Tax loss carryforwards...................................... $ 39,837 $ 29,644
Scientific Research and Experimental Development ("SR&ED")
pool...................................................... 16,664 14,960
Investment tax credits...................................... 11,180 9,824
Deferred financing costs.................................... 9,320 4,347
Other....................................................... 4,963 --
-------- --------
Total deferred tax assets................................... 81,964 58,775
Less valuation allowance on deferred tax assets............. (43,250) (53,741)
-------- --------
Net deferred tax assets..................................... 38,714 5,034
-------- --------
DEFERRED TAX LIABILITY
Intangible assets........................................... 38,714 5,034
-------- --------
Net deferred income taxes................................... $ -- $ --
======== ========
In accordance with SFAS No. 109, at the date of acquisition of DJ Pharma the
Company recognized deferred tax liabilities of $33,903,000 and deferred tax
assets of $1,011,000 for the tax consequences of differences between the
assigned values and tax bases of DJ Pharma's acquired assets and
liabilities, excluding goodwill. The Company also recognized the available
tax benefit of previously existing U.S. federal tax loss carryforwards,
through a $32,892,000 reduction in the valuation allowance, an amount equal
to the net taxable temporary differences of DJ Pharma. In addition, the
Company utilized $3,750,000 of pre-acquisition U.S. federal tax loss
carryforwards of Fuisz to reduce the current provision for income taxes on
income earned by DJ Pharma since the date of acquisition. The utilization of
these loss carryforwards resulted in a corresponding reduction in the value
of the Fuisz goodwill acquired.
At December 31, 2000, the Company has accumulated tax losses of $15,945,000
available for federal and $31,561,000 available for provincial purposes in
Canada, which expire from 2001 to 2007. The Company also has $11,176,000 of
unclaimed Canadian investment tax credits, which expire from 2001 to 2010.
The losses and investment tax credits can be used to offset future years'
taxable income.
The Company has accumulated tax losses of $84,908,000 for federal and state
purposes in the U.S., which expire from 2007 to 2019. The losses can be used
to offset future years' taxable income. There may be limitations on the
annual utilization of the U.S. net operating losses as a result of certain
changes in ownership that have occurred.
F-73
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 17 INCOME TAXES (CONTINUED)
In addition, the Company has pooled SR&ED expenditures amounting to
approximately $39,400,000 available to offset against future years' taxable
income from the Canadian operations, which may be carried forward
indefinitely.
NOTE 18 LOSS PER SHARE
In accordance with SFAS No. 128, "Earnings Per Share", earnings per share
are computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the reporting
period. Loss per share, for both periods presented, were calculated using
the weighted average number of common shares outstanding during each period,
as follows:
2000 1999
--------- ---------
Basic and diluted loss per share
Net loss.................................................... $(147,976) $(109,978)
Weighted average number of common shares outstanding
(000s).................................................... 128,824 102,542
--------- ---------
Basic and diluted loss per share............................ $ (1.16) $ (1.07)
========= =========
For 2000 and 1999, all warrants and stock options were excluded from the
calculation of diluted loss per share because the effect would have been
anti-dilutive. For both periods presented, the potential dilutive effect of
warrants and stock options on the weighted average number of common shares
outstanding was as follows:
2000 1999
(000S) (000S)
-------- --------
Weighted average number of common shares outstanding........ 128,824 102,542
Dilutive effect of warrants................................. 9,657 3,315
Dilutive effect of stock options............................ 5,031 2,317
------- -------
Adjusted weighted average number of common shares
outstanding............................................... 143,512 108,174
======= =======
For 2000, the Debentures have been excluded from the calculation of diluted
loss per share because the effect would have been anti-dilutive.
NOTE 19 COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company occupies certain facilities under lease arrangements and leases
certain equipment. Rental payments amounted to approximately $4,800,000 and
$700,000 in 2000 and 1999, respectively.
Minimum future lease payments under operating leases for the years ending
December 31 are as follows:
2001........................................................ $5,224
2002........................................................ 3,547
2003........................................................ 1,745
2004........................................................ 1,745
2005........................................................ 1,277
Thereafter.................................................. 1,606
CAPITAL COMMITMENT
On February 7, 2000, the Company entered into an agreement to acquire a
pharmaceutical manufacturing facility located in Dorado, Puerto Rico for
$11,000,000, including a $1,000,000 deposit made on the date of the
agreement. Included in the acquisition of this facility is specialized
production and packaging equipment. The closing date is scheduled for
January 2001, at which time the Company is committed to paying the remaining
acquisition price of $10,000,000.
F-74
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 20 CASH FLOW INFORMATION
NET CHANGE IN NON-CASH OPERATING ITEMS
2000 1999
-------- --------
Accounts receivable......................................... $(35,950) $(9,973)
Inventories................................................. (3,886) (1,560)
Deposits and prepaid expenses............................... (1,673) 267
Accounts payable............................................ (5,432) 9,214
Accrued liabilities......................................... (9,840) 7,399
Income taxes payable........................................ 3,779 2,604
Deferred revenue............................................ 5,772 346
-------- -------
$(47,230) $ 8,297
======== =======
ACQUISITION OF BUSINESSES, NET OF CASH ACQUIRED
2000 1999
--------- --------
Cardizem-Registered Trademark- Products..................... $(239,652) $ --
Intelligent Polymers........................................ (202,441) --
DJ Pharma................................................... (162,802) --
Fuisz....................................................... (17,250) (43,720)
--------- --------
$(622,145) $(43,720)
========= ========
NON-CASH INVESTING AND FINANCING ACTIVITIES
2000 1999
--------- --------
Long-term obligation assumed on acquisition of
Cardizem-Registered Trademark- Products............... $(161,828) $ --
Accrued acquisition costs related to the
Cardizem-Registered Trademark- Products............... (4,000) --
Long-term obligation assumed on license of Adalat Product... (58,090) --
Unrealized holding loss on long-term investments............ 893 --
Issuance of common shares on acquisition of Fuisz........... -- (88,243)
--------- --------
$(223,025) $(88,243)
========= ========
CASH PAID DURING THE YEAR
2000 1999
-------- --------
Interest paid............................................... $20,546 $14,526
Income taxes paid........................................... 1,889 1,831
NOTE 21 LEGAL PROCEEDINGS
From time to time, Biovail 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.
In this regard, Biovail Corporation and its wholly owned subsidiary, Biovail
Laboratories, Inc. ("Biovail"), have been sued in separate lawsuits by Bayer
AG and Bayer Corporation, as well as by Pfizer Inc. ("Pfizer"), upon the
filing by Biovail of separate ANDAs for
F-75
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 21 LEGAL PROCEEDINGS (CONTINUED)
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.
On April 23, 1998, Biovail filed a four-count complaint against Bayer AG,
Bayer Corporation 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 Corporation 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. commenced action
against Biovail Corporation and Biovail Laboratories, Inc. (together
"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's motion for Injunctive Relief was denied.
Biovail will contest ANDRX's allegations aggressively, and will raise
defences and counter-claims.
Since this action is at its initial stages, it is not possible to provide
any reasonable forecast at this time. Nevertheless, in the event that some
tests on ANDRX's generic Tiazac-Registered Trademark- show that it infringes
on Biovail's listed 463 Patent, Biovail will launch a patent infringement
suit against ANDRX.
In February, 2001, Biovail Laboratories, Inc. commenced an action against
Mylan Pharmaceuticals, Inc. and Pfizer Inc. 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 Pharmaceuticals, Inc. brought an action
against the FDA alleging that the FDA had improperly granted to Biovail
Laboratories, Inc. approval of its generic version of Pfizer Inc.'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. Nevertheless, this action is in the
early stages and it is not possible to be more definitive at this time with
respect to the likely result of the suit.
In November 1999, Biovail acquired Fuisz Technologies Ltd. ("Fuisz"). Fuisz
is now a wholly-owned subsidiary of Biovail and has been renamed Biovail
Technologies Ltd. ("Biovail Technologies").
In February 2000 Biovail Technologies filed a complaint in Circuit Court of
Fairfax County, Va. against Richard C. Fuisz, former chairman of Fuisz
Technologies Ltd., and several other former Fuisz executives, directors and
employees and related parties (the "Complaint"). The Complaint charges
breaches of fiduciary duties, breaches of contract, fraud, conversion,
business conspiracy and unjust enrichment arising out of a pattern of
misconduct in which the defendants pursued their personal advancement at the
expense of Fuisz. Biovail believes that the allegations against the
defendants are meritorious and has been vigorously litigating the suit.
In response to Biovail's suit, Richard Fuisz has brought certain legal
actions intended to compel Biovail to pay to him certain consulting fees
which Biovail claims are not due because of Fuisz's breach of a Consulting
Agreement pursuant to which such fees are established. Though it is
currently premature to predict the outcome of this action, Biovail believes
that the Delaware Action is without merit and has been vigorously defending
the lawsuit.
Biovail entered into a settlement with Hoechst Aktiengesselschaft and
related parties with respect to an action commenced by Biovail in
March 1998 with respect to damages to Biovail resulting from an agreement
between Hoechst and Andrx Pharmaceuticals that had the effect of blocking
the marketing of Biovail's generic version of
Cardizem-Registered Trademark- Cd.
In December 2000, the Company completed a settlement of the legal action it
had brought against Hoechst AG and related parties ("Aventis"). As a result
of this settlement, the Company received the sum of $19,500,000 as a
reimbursement for expenses directly incurred in pursuing the litigation, and
other expenses reasonably related to the litigation, during 2000. The
reimbursement has been recorded as a reduction to costs of $3,700,000
included in cost of goods sold, and to costs of $15,800,000 included in
selling, general and administrative expenses. The Company did not receive
any reimbursement for costs related to the litigation incurred prior to
2000.
F-76
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 22 RESEARCH AND DEVELOPMENT ARRANGEMENTS
TEVA PHARMACEUTICALS
In December 1997, the Company entered into an agreement with Teva
Pharmaceuticals USA, Inc. ("Teva") for the development and marketing of
certain generic oral controlled-release products. As at December 31, 2000,
generic versions of Trental, Cardizem CD, Adalat CC, Voltaren XR and
Procardia XL have been approved by the FDA, and ANDAs for two others have
been filed with the FDA.
Pursuant to a separate agreement, the Company earned research and
development revenue of $4,800,000 from Teva in 1999.
Product sales to Teva were $89,700,000 and $19,100,000 in 2000 and 1999,
respectively.
H. LUNDBECK A/S
In December 1998, the Company entered into an agreement with H. Lundbeck A/S
("Lundbeck"), for formulation, development, manufacture and supply of a
novel controlled-release formulation of the anti-depressant Citalopram.
Under the terms of the agreement, Lundbeck will pay the Company product
development fees aggregating $8,500,000, subject to certain milestones.
Payments received by the Company from Lundbeck for product development,
pursuant to the agreement, were $1,000,000 and $2,000,000 in 2000 and 1999
respectively.
NOTE 23 SEGMENTED INFORMATION AND MAJOR CUSTOMERS
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, and sales of proprietary and
in-licensed branded products by the Company's sales and marketing
operations.
The RESEARCH AND DEVELOPMENT segment covers all revenue generated by the
Company's integrated research and development facilities, and comprises
research and development services provided to third parties, including
Intelligent Polymers prior to September 29, 2000, and product development
milestone fees.
The ROYALTY AND LICENSING segment covers royalty revenue received from
licensees in respect of products for which the Company has manufacturing,
marketing and/or intellectual property rights.
The accounting policies of the segments are the same as those described in
the significant accounting policies. The Company evaluates segment
performance based on operating income after deducting selling, general and
administrative expenses attributable to the business units. Corporate
general and administrative expenses, and interest income and expense, are
not allocated to segments. Depreciation expense related to manufacturing and
research and development assets is allocated to the Product Sales and
Research and Development segments, respectively. Amortization expense
related to royalty interests is allocated to the Royalty and Licensing
segment. Amortization expense related to product rights is allocated to the
Product Sales segment. Amortization and depreciation of administrative
assets and goodwill are included as a component of unallocated selling,
general and administrative expenses.
F-77
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 23 SEGMENTED INFORMATION AND MAJOR CUSTOMERS (CONTINUED)
INFORMATION BY REPORTABLE SEGMENTS
PRODUCT RESEARCH AND ROYALTY AND
SALES DEVELOPMENT LICENSING TOTAL
-------- ------------ ----------- ----------
2000
Revenue from external customers............................. $224,996 $ 66,834 $17,340 $ 309,170
Segment operating income (loss)............................. 115,404 (201,045) 17,054 (68,587)
UNALLOCATED AMOUNTS
Selling, general and administrative expenses................ (9,445)
Interest income, net........................................ 2,955
----------
Loss before provision for income taxes...................... (75,077)
==========
Segment assets.............................................. 799,873 42,115 19,638 861,626
UNALLOCATED AMOUNTS
Cash and investments........................................ 110,776
Goodwill and other.......................................... 134,865
----------
1,107,267
==========
Segment capital expenditures, net........................... 31,402 1,916 4,000 37,318
Unallocated amount.......................................... 6,279
----------
43,597
==========
Segment depreciation and amortization....................... 11,409 4,734 1,071 17,214
Unallocated amount.......................................... 4,312
----------
$ 21,526
==========
F-78
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 23 SEGMENTED INFORMATION AND MAJOR CUSTOMERS (CONTINUED)
PRODUCT RESEARCH AND ROYALTY AND
SALES DEVELOPMENT LICENSING TOTAL
--------- ------------ ----------- --------
1999
Revenue from external customers............................. $ 99,526 $ 48,232 $24,706 $172,464
--------- -------- ------- --------
Segment operating income (loss)............................. 46,728 (92,769) 24,292 (21,749)
UNALLOCATED AMOUNTS
Selling, general and administrative expenses................ (18,411)
Equity loss................................................. (58,399)
Interest expense, net....................................... (9,152)
Gain on disposal of long-term investments, net.............. 1,948
--------
Loss before provision for income taxes...................... (105,763)
========
Segment assets.............................................. 114,076 33,552 18,888 166,516
UNALLOCATED AMOUNTS
Cash and investments........................................ 183,937
Goodwill and other.......................................... 116,726
--------
467,179
========
Segment capital expenditures, net........................... 18,137 2,562 -- 20,699
Unallocated amount.......................................... 400
--------
21,099
========
Segment depreciation and amortization....................... 3,130 3,252 1,416 7,798
Unallocated amount.......................................... 1,087
--------
$ 8,885
========
GEOGRAPHIC INFORMATION
REVENUE (1) LONG-LIVED ASSETS(2)
------------------- ---------------------
2000 1999 2000 1999
-------- -------- --------- ---------
Canada...................................................... $ 21,110 $ 16,069 $ 49,919 $ 32,523
United States............................................... 226,559 116,566 289,994 58,622
Caribbean................................................... 53,224 28,972 5,000 --
Puerto Rico and Barbados.................................... -- -- 500,204 35,272
Other foreign countries..................................... 8,277 10,857 140 327
-------- -------- -------- --------
$309,170 $172,464 $845,257 $126,744
======== ======== ======== ========
---------------
(1) Revenue is attributed to countries based on the location of customer.
(2) Consists of property, plant and equipment, goodwill, intangible and
other assets, net of depreciation and amortization.
F-79
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS,
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTE 23 SEGMENTED INFORMATION AND MAJOR CUSTOMERS (CONTINUED)
MAJOR CUSTOMERS
PERCENTAGE
OF
TOTAL
REVENUE
-------------------
2000 1999
-------- --------
Customer A.................................................. 30% 43%
Customer B.................................................. 30 14
Customer C.................................................. 17 17
NOTE 24 COMPARATIVE FIGURES
Certain of the prior year's figures have been reclassified to the
presentation adopted in the current year.
F-80
ITEM 19. EXHIBITS
1.1 Amendment to By-Laws of the Company to change quorum requirements for
meetings of shareholders of the Corporation, dated December 30, 1999(1)
1.2 Conforming Copy of Amended By-Laws of the Company effective
December 30, 1999(1)
1.3 Articles of Amendment dated December 31, 1999 effecting a stock split
and an increase in the authorized share capital of the Company(2)
1.4 Articles of Amalgamation dated February 18, 2000 effecting a change in
the name of the Company(2)
1.5 Articles of Amalgamation of Biovail Corporation International(2)
10.a.1 Consent of Ernst & Young LLP
10.a.2 Consent of Deloitte & Touche LLP
1.6 Articles of Amendment of Biovail Corporation International(2)
1.7 Articles of Amalgamation of Biovail Corporation(2)
1.8 By-law No. A of Biovail Corporation(2)
----------------
(1) Incorporated by reference to Registrant's Annual Report on Form 20-F
for the fiscal year ended December 31, 1999, File No. 001-11145.
(2) Incorporated by reference to Registrant's Registration Statement on
Form 8-A, filed with the SEC on March 17, 2000, File No. 001-14956.
II-1
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
Date: May 24, 2001 BIOVAIL CORPORATION
/s/ BRIAN H. CROMBIE
Brian H. Crombie
SENIOR VICE PRESIDENT, AND
CHIEF FINANCIAL OFFICER
II-2
EXHIBIT INDEX
1.1 Amendment to By-Laws of the Company to change quorum requirements for
meetings of shareholders of the Corporation, dated December 30, 1999(1)
1.2 Conforming Copy of Amended By-Laws of the Company effective December 30,
1999(1)
1.3 Articles of Amendment dated December 31, 1999 effecting a stock split and an
increase in the authorized share capital of the Company(2)
1.4 Articles of Amalgamation dated February 18, 2000 effecting a change in the
name of the Company(2)
1.5 Articles of Amalgamation of Biovail Corporation International(2)
1.6 Articles of Amendment of Biovail Corporation International(2)
1.7 Articles of Amalgamation of Biovail Corporation(2)
1.8 By-Law No. A of Biovail Corporation(2)
10.a.1 Consent of Ernst & Young LLP
10.a.2 Consent of Deloitte & Touche LLP
------------
(1) Incorporated by reference to Registrant's Annual Report on Form 20-F for the
fiscal year ended December 31, 1999, File No. 001-11145.
(2) Incorporated by reference to Registrant's Registration Statement on
Form 8-A, filed with the SEC on March 17, 2000, File No. 001-14956.
II-3