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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 6-K
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
COMMISSION FILE NUMBER 001-11145
BIOVAIL CORPORATION
(TRANSLATION OF REGISTRANT'S NAME INTO ENGLISH)
2488 DUNWIN DRIVE, MISSISSAUGA, ONTARIO, L5L 1J9, CANADA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (416) 285-6000
INDICATE BY CHECK MARK WHETHER THE REGISTRANT FILES OR WILL FILE ANNUAL REPORTS
UNDER COVER OF FORM 20-F OR FORM 40-F.
FORM 20-F /X/ FORM 40-F / /
INDICATE BY CHECK MARK WHETHER THE REGISTRANT BY FURNISHING THE INFORMATION
CONTAINED IN THIS FORM IS ALSO THEREBY FURNISHING THE INFORMATION TO THE
COMMISSION
PURSUANT TO RULE 12g 3-2(b) UNDER THE SECURITIES EXCHANGE ACT OF 1934.
YES / / NO /X/
--------------------------------------------------------------------------------
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BIOVAIL CORPORATION
QUARTERLY REPORT
THIS REPORT OF FOREIGN ISSUER ON FORM 6-K IS INCORPORATED BY REFERENCES INTO
THE REGISTRATION STATEMENT ON FORM S-8 OF BIOVAIL CORPORATION (REGISTRATION
NO. 333-92229).
INDEX
PART I -- FINANCIAL INFORMATION
Financial Statements
Consolidated Balance Sheets as at June 30, 2001 and
December 31, 2000...................................... 2
Consolidated Statements of Income (Loss) for the three
months and six months ended June 30, 2001 and 2000..... 3
Consolidated Statements of Cash Flows for the six months
ended June 30, 2001 and 2000........................... 4
Condensed Notes to the Consolidated Financial
Statements............................................. 5
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
Quantitative and Qualitative Disclosure about Market Risk... 20
PART II -- OTHER INFORMATION
Operational Information..................................... 23
Legal Proceedings........................................... 23
Material Issued to Shareholders............................. 23
As used in this report, unless the context otherwise indicates,
the terms "we", "us", "our" and similar terms as well as
references to "Biovail" or the "Company", means Biovail
Corporation.
All dollar amounts in this report are expressed in
U.S. dollars.
1
BIOVAIL CORPORATION
CONSOLIDATED BALANCE SHEETS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
JUNE 30 DECEMBER 31
2001 2000
---------- ------------
ASSETS
CURRENT
Cash and cash equivalents................................... $ 68,276 $ 125,144
Accounts receivable [NOTE 3]................................ 88,377 105,850
Inventories [NOTE 4]........................................ 39,156 24,108
Deposits and prepaid expenses............................... 4,565 5,347
---------- ----------
200,374 260,449
Long-term investments....................................... 2,413 1,561
Property, plant and equipment, net.......................... 76,712 52,541
Goodwill, net............................................... 98,823 103,105
Intangible assets, net [NOTE 5]............................. 647,945 667,431
Other assets, net........................................... 20,900 22,180
---------- ----------
$1,047,167 $1,107,267
========== ==========
LIABILITIES
CURRENT
Accounts payable............................................ $ 30,425 $ 34,683
Accrued liabilities......................................... 46,778 35,452
Income taxes payable........................................ 9,899 6,711
Deferred revenue............................................ 38,413 26,334
Current portion of long-term obligations [NOTE 6]........... 95,923 182,564
---------- ----------
221,438 285,744
Deferred revenue............................................ 25,500 27,900
Long-term obligations [NOTE 6].............................. 174,487 256,180
Convertible Subordinated Preferred Equivalent Debentures
[NOTE 14]................................................. 299,985 299,985
---------- ----------
721,410 869,809
---------- ----------
SHAREHOLDERS' EQUITY
Common shares, no par value, unlimited shares authorized,
132,586,000 and 131,461,000 issued and outstanding at
June 30, 2001 and December 31, 2000, respectively
[NOTE 7].................................................. 497,908 482,842
Stock options outstanding................................... 9,461 9,891
Warrants [NOTE 14].......................................... 7,912 7,912
Deficit..................................................... (188,550) (261,819)
Accumulated other comprehensive loss........................ (974) (1,368)
---------- ----------
325,757 237,458
---------- ----------
$1,047,167 $1,107,267
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
2
BIOVAIL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS EXCEPT PER SHARE DATA ARE EXPRESSED IN THOUSANDS OF
U.S. DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- ---------
REVENUE
Product sales.............................................. $ 125,398 $ 45,384 $ 237,325 $ 81,237
Research and development................................... 1,963 16,645 3,529 28,296
Royalty and licensing...................................... 6,143 3,135 11,877 6,413
--------- --------- --------- ---------
133,504 65,164 252,731 115,946
--------- --------- --------- ---------
EXPENSES
Cost of goods sold......................................... 27,321 13,525 53,662 24,547
Research and development................................... 13,675 13,620 24,845 25,065
Selling, general and administrative........................ 24,527 13,800 51,253 25,034
Amortization expense....................................... 10,849 991 21,451 2,027
--------- --------- --------- ---------
76,372 41,936 151,211 76,673
--------- --------- --------- ---------
Operating income........................................... 57,132 23,228 101,520 39,273
Interest income (expense), net............................. (9,719) 2,383 (22,191) 2,117
--------- --------- --------- ---------
Income before income taxes................................. 47,413 25,611 79,329 41,390
Provision for income taxes................................. 3,310 1,444 6,060 2,257
--------- --------- --------- ---------
Income before extraordinary item and cumulative effect of
change in accounting principle........................... 44,103 24,167 73,269 39,133
Extraordinary item......................................... -- -- -- (20,039)
--------- --------- --------- ---------
Income before cumulative effect of change in accounting
principle................................................ 44,103 24,167 73,269 19,094
Cumulative effect of change in accounting principle........ -- -- -- (43,500)
--------- --------- --------- ---------
NET INCOME (LOSS).......................................... $ 44,103 $ 24,167 $ 73,269 $ (24,406)
========= ========= ========= =========
BASIC EARNINGS (LOSS) PER SHARE [NOTE 8]
Income before extraordinary item and cumulative effect of
change in accounting principle........................... $ 0.33 $ 0.19 $ 0.55 $ 0.31
Extraordinary item......................................... -- -- -- (0.16)
Cumulative effect of change in accounting principle........ -- -- -- (0.34)
--------- --------- --------- ---------
Net income (loss).......................................... $ 0.33 $ 0.19 $ 0.55 $ (0.19)
========= ========= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE [NOTE 8]
Income before extraordinary item and cumulative effect of
change in accounting principle........................... $ 0.30 $ 0.17 $ 0.50 $ 0.28
Extraordinary item......................................... -- -- -- (0.14)
Cumulative effect of change in accounting principle........ -- -- -- (0.31)
--------- --------- --------- ---------
Net income (loss).......................................... $ 0.30 $ 0.17 $ 0.50 $ (0.17)
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (000S)
[NOTE 8]
Basic...................................................... 132,297 129,530 132,037 127,550
========= ========= ========= =========
Diluted.................................................... 147,933 143,118 147,735 141,850
========= ========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
3
BIOVAIL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS ARE EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30
-------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $ 73,269 $(24,406)
Depreciation and amortization............................... 27,357 10,018
Amortization of discount on long-term obligations........... 7,115 --
Deferred income taxes....................................... 1,450 --
Compensation cost for employee stock options................ 999 --
Extraordinary item.......................................... -- 20,039
Cumulative effect of change in accounting principle......... -- 43,500
-------- --------
110,190 49,151
Change in non-cash operating items [NOTE 10]................ 27,222 (38,959)
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES....................... 137,412 10,192
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment, net............. (28,939) (5,791)
Additions to intangible assets.............................. (13,954) --
Reduction in intangible assets.............................. 11,352 261
Acquisition of long-term investments........................ (209) (2,285)
Maturity of short-term investments, net..................... -- 4,218
Proceeds from sale of assets held for disposal.............. -- 20,000
-------- --------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES............. (31,750) 16,403
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common shares................................... 13,617 102,822
Proceeds from the exercise of warrants...................... 20 --
Repayments under revolving term credit facility............. (75,790) --
Reduction in other long-term obligations.................... (100,365) (10,657)
Issuance of Convertible Subordinated Preferred Equivalent
Debentures, net of financing costs........................ -- 289,410
Repurchase of U.S. Dollar Senior Notes...................... -- (141,017)
Collection of warrant subscription receivable............... -- 2,287
-------- --------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............. (162,518) 242,845
-------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... (12) (73)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (56,868) 269,367
Cash and cash equivalents, beginning of period.............. 125,144 178,086
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 68,276 $447,453
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
4
BIOVAIL CORPORATION
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS EXCEPT PER SHARE DATA ARE EXPRESSED IN THOUSANDS OF
U.S. DOLLARS)
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by the Company in U.S. dollars and in accordance with
U.S. generally accepted accounting principles ("GAAP"). The interim
financial statements have been prepared using accounting policies that are
consistent with policies used in preparing the fiscal year 2000 annual
consolidated financial statements. Accordingly, these unaudited condensed
notes to the consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto
contained in the Company's Annual Report on Form 20-F for the fiscal year
ended December 31, 2000. Certain of the prior year's interim figures have
been reclassified to conform to the current interim period's presentation.
In preparing the Company's consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual results could
differ from these estimates and the operating results for the interim
periods presented are not necessarily indicative of the results expected for
the full year.
2. CHANGES IN ACCOUNTING PRINCIPLES
REVENUE RECOGNITION
Non-refundable, up-front fees for access to the Company's proprietary
technology in connection with certain research and development arrangements
are deferred and recognized as revenue on a straight-line basis over the
term of the relevant arrangement. License revenue is deferred and recognized
on a straight-line basis over the license period. If there are future
performance obligations of the Company, or contingent future events relating
to the amounts received or receivable under license agreements, revenue
attributable to these obligations or future events is deferred and
recognized upon the completion of the specific event.
In the fourth quarter of 2000, the Company implemented the provisions of the
U.S. Securities and Exchange Commission's, Staff Accounting Bulletin
No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements",
retroactively to January 1, 2000. Accordingly, the Company changed its
method of accounting to that described above for up-front research and
development, product license and certain other fees. The Company
historically recognized these fees as revenue when all the conditions to
payment had been met, and there were no further performance contingencies or
conditions to the Company's receipt of payment. These fees were not
creditable against future payments. At January 1, 2000, the cumulative
effect of the change in accounting principle on prior years resulted in a
charge of $43,500,000, which is included in the net loss for the six months
ended June 30, 2000. The related deferred revenue recognized for the three
months ended June 30, 2001 and 2000 was $1,575,000 and $1,825,000,
respectively, and for the six months ended June 30, 2001 and 2000 was
$3,150,000 and $3,650,000, respectively.
ACCOUNTING FOR DERIVATIVES
The Company implemented the Financial Accounting Standards Board's ("FASB"),
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". 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 adoption of SFAS
No. 133 did not result in any cumulative effect adjustment in the
consolidated statements of income (loss), and did not have a material impact
on the Company's financial position or results of operations as the Company
does not use derivative financial instruments or engage in hedging
activities.
NEW ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets", effective for fiscal
years beginning after December 15, 2001. Under SFAS No. 141, all business
combinations occurring after June 30, 2001 are to be accounted for under the
purchase method of accounting. Under SFAS No. 142, goodwill and other
5
BIOVAIL CORPORATION
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS EXCEPT PER SHARE DATA ARE EXPRESSED IN THOUSANDS OF
U.S. DOLLARS)
(UNAUDITED)
2. CHANGES IN ACCOUNTING PRINCIPLES (CONTINUED)
intangible assets deemed to have indefinite lives will no longer be
amortized, but will be subject to annual impairment tests. Other intangible
assets will continue to be amortized over their estimated useful lives.
The Company will adopt SFAS No. 142 as of January 1, 2002 as required. The
Company will perform the first of the required impairment tests of goodwill
and indefinite lived intangible assets as of January 1, 2002. Any impairment
loss for goodwill and indefinite lived intangible assets arising from the
initial application of SFAS No. 142 is to be reported as resulting from a
change in accounting principle. The Company has not yet determined what the
effect of adopting the provisions of SFAS No. 142 will be on the Company's
financial position or results of operations.
3. ACCOUNTS RECEIVABLE
JUNE 30 DECEMBER 31
2001 2000
-------- ------------
Trade....................................................... $ 79,637 $ 98,442
Royalties................................................... 5,215 3,565
Other....................................................... 3,525 3,843
-------- --------
$ 88,377 $105,850
======== ========
4. INVENTORIES
JUNE 30 DECEMBER 31
2001 2000
-------- ------------
Raw materials............................................... $ 7,589 $ 7,140
Work in process............................................. 9,228 5,079
Finished goods.............................................. 22,339 11,889
-------- --------
$ 39,156 $ 24,108
======== ========
5. INTANGIBLE ASSETS
JUNE 30 DECEMBER 31
2001 2000
-------- ------------
Workforce................................................... $ 7,241 $ 7,241
Core technology............................................. 11,185 11,185
Brand names, product rights, royalty interests and
patents................................................... 659,074 662,096
-------- --------
677,500 680,522
Less accumulated amortization............................... 29,555 13,091
-------- --------
$647,945 $667,431
======== ========
Amortization expense amounted to $9,800,000 and $1,569,000 for the three
months ended June 30, 2001 and 2000, respectively, and $19,353,000 and
$4,731,000 for the six months ended June 30, 2001 and 2000, respectively.
6
BIOVAIL CORPORATION
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS EXCEPT PER SHARE DATA ARE EXPRESSED IN THOUSANDS OF
U.S. DOLLARS)
(UNAUDITED)
6. LONG-TERM OBLIGATIONS
JUNE 30 DECEMBER 31
2001 2000
-------- ------------
Revolving term credit facility.............................. $135,010 $210,000
Aventis obligation.......................................... 82,694 161,828
Elan obligation............................................. 45,048 58,090
Deferred compensation....................................... 7,658 8,311
Non-interest bearing government loan........................ -- 470
Other debt.................................................. -- 45
-------- --------
270,410 438,744
Less current portion........................................ 95,923 182,564
-------- --------
$174,487 $256,180
======== ========
In June 2001, the Company's revolving term Senior Secured Credit Facility
was syndicated and the Company's available line of credit under the facility
was increased to $400,000,000. All other material terms and conditions are
unchanged.
Interest expense on long-term obligations amounted to $5,124,000 and $91,000
for the three months ended June 30, 2001 and 2000, respectively, and
$13,011,000 and $3,795,000 for the six months ended June 30, 2001 and 2000,
respectively. Interest expense for the three months and six months ended
June 30, 2001 included $3,161,000 and $7,115,000, respectively, related to
the amortization of the discount on the Aventis and Elan obligations.
7. COMMON SHARES
During the six months ended June 30, 2001 and 2000, the Company issued
1,123,012 and 1,202,386 common shares, respectively, on the exercise of
stock options and through the Company's Employee Stock Purchase Plan, and
received proceeds of $13,617,000 and $7,076,000, respectively.
During the six months ended June 30, 2001, the Company issued 2,000 common
shares on the exercise of 500 warrants, and received proceeds of $20,000.
During the six months ended June 30, 2000, no warrants were exercised.
The number of common shares outstanding at June 30, 2001 and December 31,
2000 were 132,586,072 and 131,461,060, respectively. The number of stock
options outstanding at June 30, 2001 and December 31, 2000 were 8,396,572
and 10,049,248, respectively.
8. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is determined in accordance with SFAS No. 128,
"Earnings Per Share". Earnings (loss) per share is based on net income
(loss). Basic earnings (loss) per share is computed using the weighted
average number of common shares outstanding during the reporting period.
Diluted earnings (loss) per share is computed after giving effect to the
potentially
7
BIOVAIL CORPORATION
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS EXCEPT PER SHARE DATA ARE EXPRESSED IN THOUSANDS OF
U.S. DOLLARS)
(UNAUDITED)
8. EARNINGS (LOSS) PER SHARE (CONTINUED)
dilutive warrants, stock options and convertible securities. The computation
of basic and diluted earnings (loss) per share was as follows (number of
common shares in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
BASIC EARNINGS (LOSS) PER SHARE
Net income (loss)........................................... $ 44,103 $ 24,167 $ 73,269 $(24,406)
Weighted average number of common shares outstanding........ 132,297 129,530 132,037 127,550
-------- -------- -------- --------
Basic earnings (loss) per share............................. $ 0.33 $ 0.19 $ 0.55 $ (0.19)
======== ======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE
Net income (loss)........................................... $ 44,103 $ 24,167 $ 73,269 $(24,406)
Weighted average number of common shares outstanding........ 132,297 129,530 132,037 127,550
Dilutive effect of warrants................................. 10,649 8,696 10,682 9,084
Dilutive effect of stock options............................ 4,987 4,892 5,016 5,216
-------- -------- -------- --------
Adjusted weighted average number of common shares
outstanding............................................... 147,933 143,118 147,735 141,850
-------- -------- -------- --------
Diluted earnings (loss) per share........................... $ 0.30 $ 0.17 $ 0.50 $ (0.17)
======== ======== ======== ========
For all periods presented, the Convertible Subordinated Preferred Equivalent
Debentures have been excluded from the calculation of diluted earnings
(loss) per share because the effect would have been anti-dilutive.
9. COMPREHENSIVE INCOME (LOSS)
Pursuant to the requirements of SFAS No. 130 "Reporting Comprehensive
Income", which established standards for the reporting of comprehensive
income and its components, the following disclosure is provided:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income (loss)........................................... $ 44,103 $ 24,167 $ 73,269 $(24,406)
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustment..................... 1,376 (1,090) (248) (1,529)
Unrealized holding gain (loss) on long-term investments..... 571 (1,536) 642 (643)
-------- -------- -------- --------
Other comprehensive income (loss)........................... 1,947 (2,626) 394 (2,172)
-------- -------- -------- --------
Comprehensive income (loss)................................. $ 46,050 $ 21,541 $ 73,663 $(26,578)
======== ======== ======== ========
8
BIOVAIL CORPORATION
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS EXCEPT PER SHARE DATA ARE EXPRESSED IN THOUSANDS OF
U.S. DOLLARS)
(UNAUDITED)
10. CHANGE IN NON-CASH OPERATING ITEMS
SIX MONTHS ENDED
JUNE 30
-------------------
2001 2000
-------- --------
Accounts receivable......................................... 17,502 (22,041)
Inventories................................................. (15,026) (11,517)
Deposits and prepaid expenses............................... 781 97
Accounts payable and accrued liabilities.................... 11,093 (7,961)
Income taxes payable........................................ 3,193 1,153
Deferred revenue............................................ 9,679 1,310
-------- --------
$ 27,222 $(38,959)
======== ========
11. LEGAL PROCEEDINGS
From time to time, the Company becomes involved in various legal proceedings
which it considers to be in the ordinary course of business. The vast
majority of these proceedings involve intellectual property issues that
often result in patent infringement suits brought by patent holders upon the
filing of ANDA applications. The timing of these actions is mandated by
statute and may result in a delay of FDA approval for such filed ANDAs until
the final resolution of such actions or the expiry of 30 months, whichever
occurs earlier.
The Company has recently commenced an action against Eli Lilly and Company
("Lilly") in which Biovail is seeking substantial damages as a result of
Lilly's voluntary recall of Biovail's product Keftab. Lilly is under
contract with Biovail to manufacture and supply the product to Biovail for
marketing in the United States. Lilly has forced a recall of the product
because of its manufacturing issues in supplying a stable product.
Biovail believes its claims against Lilly for damages it has suffered as a
result of the Keftab recall are meritorious and is proceeding in its legal
action with dispatch.
The Company has recently been sued by Novartis Corporation for patent
infringement in respect of its filed product Carbamazepine. The Company has
asserted vigorous defences and is of the opinion that Novartis' action is
meritless.
The Company has 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 in which Andrx alleged that Biovail had improperly listed a
patent (No. 6,162,463) in the FDA's "Orange/Book" and sought declaratory and
injunctive relief including a de-listing of the patent, and alleged further
that in listing such patent, Biovail had violated certain statutes and the
common law. Andrx' motion for injunctive relief was denied.
Biovail has denied Andrx' allegations and has asserted a counterclaim for
breach of the Lanham Act with respect to Andrx' claim that it has developed
a bioequivalent version of Biovail's Product Tiazac.
9
BIOVAIL CORPORATION
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS EXCEPT PER SHARE DATA ARE EXPRESSED IN THOUSANDS OF
U.S. DOLLARS)
(UNAUDITED)
11. LEGAL PROCEEDINGS (CONTINUED)
Biovail has launched a patent infringement action against Andrx in which
Biovail has claimed that Andrx' product infringes Biovail's '463 Patent.
In February 2001, Biovail 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
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. Mylan has
appealed and a decision is forthcoming. 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.
In February 2000, Biovail 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.
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. All issues have now
been settled with full dismissal of Dr. Fuisz' claim for the payment under
his Consulting Agreement.
12. RELATED PARTY TRANSACTIONS
In March 2001, the Company loaned $600,000 to an executive officer of the
Company. The loan is secured by a charge on the officer's personal
residence. The loan does not bear interest until March 1, 2004 and
thereafter bears interest at a rate equal to the Company's rate of
borrowing. The loan is due on the earlier of termination of employment or
March 31, 2008.
In June 2001, the Company acquired a corporate aircraft from an entity
controlled by the Chairman of the Company's Board of Directors for cash
consideration of $10,475,000. The exchange amount was established based on
recent comparable market prices for the aircraft. At June 30, 2001, no
amount was owing to the related party.
13. SEGMENTED INFORMATION
Organizationally, the Company's operations consist of three
segments -- Product Sales, Research and Development, and Royalty and
Licensing. The segments are determined based on several factors including
customer base, the nature of the product or service provided, delivery
channels and other factors.
The PRODUCT SALES segment covers sales of production from the Company's
Puerto Rican and Canadian facilities, and sales of proprietary and
in-licensed branded products by the Company's sales and marketing
operations.
The RESEARCH AND DEVELOPMENT segment covers all revenues generated by the
Company's integrated research and development facilities, and comprises
research and development services provided to third parties, including
Intelligent Polymers Limited prior to September 29, 2000, and product
development milestone fees.
10
BIOVAIL CORPORATION
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS EXCEPT PER SHARE DATA ARE EXPRESSED IN THOUSANDS OF
U.S. DOLLARS)
(UNAUDITED)
13. SEGMENTED INFORMATION (CONTINUED)
The ROYALTY AND LICENSING segment covers royalty revenues received from
licensees in respect of products for which the Company has manufacturing,
marketing and/or intellectual property rights.
INFORMATION BY REPORTABLE SEGMENTS
PRODUCT RESEARCH AND ROYALTY AND
THREE MONTHS ENDED JUNE 30, 2001 SALES DEVELOPMENT LICENSING TOTAL
-------------------------------- -------- ------------ ----------- --------
Revenue from external customers............................. $125,398 $ 1,963 $ 6,143 $133,504
-------- -------- -------- --------
Segment operating income (loss)............................. 68,820 (13,078) 6,079 61,821
UNALLOCATED AMOUNTS
Selling, general and administrative expenses................ (4,689)
Interest expense, net....................................... (9,719)
--------
Income before income taxes.................................. $ 47,413
========
PRODUCT RESEARCH AND ROYALTY AND
THREE MONTHS ENDED JUNE 30, 2000 SALES DEVELOPMENT LICENSING TOTAL
-------------------------------- -------- ------------ ----------- --------
Revenue from external customers............................. $ 45,384 $ 16,645 $ 3,135 $ 65,164
-------- -------- -------- --------
Segment operating income (loss)............................. 21,979 (63) 3,122 25,038
UNALLOCATED AMOUNTS
Selling, general and administrative expenses................ (1,810)
Interest income, net........................................ 2,383
--------
Income before income taxes.................................. $ 25,611
========
PRODUCT RESEARCH AND ROYALTY AND
SIX MONTHS ENDED JUNE 30, 2001 SALES DEVELOPMENT LICENSING TOTAL
------------------------------ -------- ------------ ----------- --------
Revenue from external customers............................. $237,325 $ 3,529 $ 11,877 $252,731
-------- -------- -------- --------
Segment operating income (loss)............................. 123,601 (24,218) 11,726 111,109
UNALLOCATED AMOUNTS
Selling, general and administrative expenses................ (9,589)
Interest expense, net....................................... (22,191)
--------
Income before income taxes.................................. $ 79,329
========
PRODUCT RESEARCH AND ROYALTY AND
SIX MONTHS ENDED JUNE 30, 2000 SALES DEVELOPMENT LICENSING TOTAL
------------------------------ -------- ------------ ----------- --------
Revenue from external customers............................. $ 81,237 $ 28,296 $ 6,413 $115,946
-------- -------- -------- --------
Segment operating income (loss)............................. 38,567 (1,707) 6,360 43,220
UNALLOCATED AMOUNTS
Selling, general and administrative expenses................ (3,947)
Interest income, net........................................ 2,117
--------
Income before income taxes.................................. $ 41,390
========
11
BIOVAIL CORPORATION
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(TABULAR AMOUNTS EXCEPT PER SHARE DATA ARE EXPRESSED IN THOUSANDS OF
U.S. DOLLARS)
(UNAUDITED)
14. SUBSEQUENT EVENTS
CONVERTIBLE SUBORDINATED PREFERRED EQUIVALENT DEBENTURES
During August 2001, the Company entered into privately negotiated agreements
with certain holders of its outstanding 6.75% Convertible Subordinated
Preferred Equivalent Debentures, due March 31, 2025 ("Debentures"). To date,
these agreements provided for the issuance of 5,982,541 common shares to
those certain Debenture holders upon their surrender of $165,470,000
aggregate principal amount of outstanding Debentures. In the third quarter
2001, the Company will record a charge to income of $23,969,000 which
represents the market value of the additional shares issued in excess of the
number of shares which would have been issued under the terms of the
conversion ratio provided for in the indenture governing the Debentures.
Following the surrender of Debentures described above, $134,515,000
aggregate principal amount of Debentures remain outstanding.
WARRANTS
During August 2001, the Company entered into privately negotiated agreements
with certain holders of its outstanding warrants. To date, these agreements
provided for the exercise of 513,800 warrants to purchase 2,055,200 common
shares. Each warrant entitled the holder to purchase four post-split common
shares of the Company at an exercise price of $10.00 per share. As an
inducement to those certain warrant holders to exercise by an agreed upon
time, the Company paid such warrant holders $2.00 per warrant exercised. In
aggregate, the Company received proceeds of $19,524,000 net of the
inducement cost of $1,028,000. Following the exercise of warrants described
above, 3,072,950 warrants to purchase 12,291,800 common shares remain
outstanding.
12
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS ARE EXPRESSED IN U.S. DOLLARS)
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") should be read in conjunction with the
accompanying unaudited consolidated financial statements and condensed notes
thereto. This MD&A should also be read in conjunction with the MD&A and audited
consolidated financial statements and notes thereto contained in our Annual
Report on Form 20-F for the fiscal year ended December 31, 2000.
OVERVIEW
Our results for the second quarter and first half of 2001 reflected the
impact of the strategic business acquisitions completed during fiscal year 2000.
Most notably the increase in our product sales reflected the addition of the
Cardizem-Registered Trademark- product line ("Cardizem-Registered Trademark-")
which we acquired from Aventis Pharmaceuticals Inc. ("Aventis").
Cardizem-Registered Trademark- is being marketed in Canada through Crystaal, and
in the United States through Biovail Pharmaceuticals, Inc. ("Biovail
Pharmaceuticals"), formerly DJ Pharma, Inc. ("DJ Pharma"), which we acquired in
October 2000. In addition to Cardizem-Registered Trademark-, our second quarter
and first half 2001 product sales included the incremental revenue from Biovail
Pharmaceuticals' existing branded product portfolio. The decline in research and
development revenue reflected our December 2000 acquisition of Intelligent
Polymers Limited ("Intelligent Polymers") and its development pipeline of
branded generic products, which we were developing on their behalf prior to
September 29, 2000.
Our revenues are derived from sales of pharmaceutical products, providing
research and development services, and from royalties and license fees. Product
sales include sales of products developed and manufactured by us for our
licensees, direct marketing in Canada and the United States of proprietary and
in-licensed products, and revenue derived from product co-promotion. Research
and development revenues relate to product development activity on behalf of
third parties, and pharmaceutical contract research services. Royalties
primarily arise on sales of the products we developed. License fees are derived
from the license of our technologies or product rights.
CHANGES IN ACCOUNTING PRINCIPLES
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, 2000. Accordingly, we have
changed our revenue recognition accounting policy for up-front research and
development, product license and certain other fees. Historically, we had
recognized these fees as revenue when all the conditions to payment had been
met, and there were no further performance contingencies or conditions to our
receipt of payment. These fees were not creditable against future payments. At
January 1, 2000, the cumulative effect of the change in accounting principle on
prior years resulted in a charge of $43.5 million, which is included in the net
loss for the six months ended June 30, 2000. The related deferred revenue
recognized for the three months ended June 30, 2001 and 2000 was $1.6 million
and $1.8 million, respectively, and for the six months ended June 30, 2001 and
2000 was $3.2 million and $3.6 million, respectively.
13
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS ARE EXPRESSED IN U.S. DOLLARS)
ACCOUNTING FOR DERIVATIVES
We implemented the Financial Accounting Standards Board's ("FASB"),
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". 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 adoption of SFAS No. 133 did not
result in any cumulative effect adjustment in the consolidated statements of
income (loss), and did not have a material impact on our financial position or
results of operations as we do use derivative financial instruments or engage in
hedging activities.
RESULTS OF OPERATIONS
Total revenue for the second quarter 2001 was $133.5 million, an increase of
$68.3 million or 105% from $65.2 million for the second quarter 2000. Net income
for the second quarter 2001 was $44.1 million, or diluted earnings per share of
$0.30, compared to $24.2 million, or diluted earnings per share of $0.17, for
the second quarter 2000. Net income and diluted earnings per share increased by
82% and 76%, respectively for the second quarter 2001 compared to the second
quarter 2000.
Total revenue for the six months ended June 30, 2001 was $252.7 million, an
increase of $136.8 million or 118% from $115.9 million for the same period last
year. Income before extraordinary item and cumulative effect of change in
accounting principle for the six months ended June 30, 2001 was $73.3 million,
or diluted earnings per share of $0.50, compared to $39.1 million, or diluted
earnings per share of $0.28, for the same period last year. Income before
extraordinary item and cumulative effect of change in accounting principle and
diluted earnings per share increased by 87% and 79%, respectively for the six
months ended June 30, 2001 compared to the same period last year.
The results for the six months ended June 30, 2000, included first quarter
2000 charges of $20.0 million for the premium paid to extinguish our 10 7/8%
U.S. Dollar Senior Notes (the "Senior Notes"), and $43.5 million for the
cumulative effect at January 1, 2000 of the adoption of the SAB 101.
REVENUE
The following table displays, for each period indicated, the dollar amount
of each source of revenue and total revenue, and the percentage change in the
dollar amount of each source and the total as compared to the corresponding
prior year period.
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------------- --------------------------------
2001 2000 PERCENTAGE 2001 2000 PERCENTAGE
$000S $000S CHANGE $000S $000S CHANGE
-------- -------- ---------- -------- -------- ----------
Product sales................... $125,398 $ 45,384 176% $237,325 $ 81,237 192%
Research and development........ 1,963 16,645 (88%) 3,529 28,296 (88%)
Royalty and licensing........... 6,143 3,135 96% 11,877 6,413 85%
-------- -------- -------- --------
Total revenue................... $133,504 $ 65,164 105% $252,731 $115,946 118%
======== ======== ==== ======== ======== ====
14
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS ARE EXPRESSED IN U.S. DOLLARS)
PRODUCT SALES
Product sales for the second quarter 2001 were $125.4 million compared to
$45.4 million for the second quarter 2000, an increase of $80.0 million or 176%.
Product sales for the six months ended June 30, 2001 were $237.3 million
compared to $81.2 million for the same period last year, an increase of
$156.1 million or 192%. As a percentage of total revenue, product sales
increased to 94% for the three months and six months ended June 30, 2001
compared to 70% for same periods last year.
The increase in product sales was due to a combination of the contribution
from Cardizem-Registered Trademark-, incremental revenues from Biovail
Pharmaceuticals' branded products, and strong sales from our controlled-release
generic product portfolio, which were favourably impacted by the February 2001
launch of Procardia XL 30mg dosage and the fiscal year 2000 launches of Voltaren
XR, Adalat CC 30mg and 60mg dosages, and Procardia XL 60mg dosage.
On March 7, 2001, Eli Lilly & Company ("Eli Lilly") announced a voluntary
recall of Keftab tablets because of undefined problems with stability. Eli Lilly
manufactures and supplies the product to Biovail Pharmaceuticals for marketing
in the United States. As a result of this recall, our product sales and gross
margins for the second quarter and first half of 2001 have been negatively
impacted by lost sales and costs associated with the recall. We believe Eli
Lilly is responsible for manufacturing and supplying acceptable products to us,
as well as for the cost of the recall.
RESEARCH AND DEVELOPMENT
Research and development revenue for the second quarter 2001 was
$2.0 million, a decline of $14.6 million or 88% from $16.6 million for the
second quarter 2000. Research and development revenue for the six months ended
June 30, 2001 was $3.5 million, a decline of $24.8 million or 88% from
$28.3 million for the same period last year. As a percentage of total revenue,
research and development revenue declined to 1% for the three months and six
months ended June 30, 2001 compared to 25% and 24% for the three months and six
months ended June 30, 2000, respectively.
The decline in research and development revenue reflected our acquisition of
Intelligent Polymers in December 2000, and the elimination of revenue from
development activities performed on their behalf. We recorded revenue from
Intelligent Polymers of $13.8 million and $23.4 million for the three months and
six months ended June 30, 2000, respectively.
ROYALTY AND LICENSING
Net royalty and licensing revenue for the second quarter 2001 was
$6.1 million compared to $3.1 million for the second quarter 2000, an increase
of $3.0 million or 96%. Net royalty and licensing revenue for the six months
ended June 30, 2001 was $11.9 million compared to $6.4 million for the same
period last year, an increase of $5.5 million or 85%. As a percentage of total
revenue, royalty and licensing revenue remained relatively constant at between
5% and 6% for all periods.
For all periods, most of our royalty and licensing revenue was derived from
royalties on sales of Tiazac-Registered Trademark- to Forest Laboratories Inc.
The increases in the three months and six months ended June 30, 2001, compared
to the same periods last year, reflected higher Tiazac-Registered Trademark-
product sales, and the inclusion of a royalty associated with sales of
Cardizem-Registered Trademark- by a third party.
15
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS ARE EXPRESSED IN U.S. DOLLARS)
OPERATING EXPENSES
The following table displays, for each period indicated, the dollar amount
of each operating expense item and total operating expenses, and the percentage
change in the dollar amount of each item and the total as compared to the
corresponding prior year period.
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------------- --------------------------------
2001 2000 PERCENTAGE 2001 2000 PERCENTAGE
$000S $000S CHANGE $000S $000S CHANGE
-------- -------- ---------- -------- -------- ----------
Cost of goods sold................. $27,321 $13,525 102% $ 53,662 $24,547 119%
Research and development........... 13,675 13,620 0% 24,845 25,065 (1%)
Selling, general and
administrative................... 24,527 13,800 78% 51,253 25,034 105%
Amortization expense............... 10,849 991 995% 21,451 2,027 958%
------- ------- -------- -------
Total expenses..................... $76,372 $41,936 82% $151,211 $76,673 97%
======= ======= ==== ======== ======= ====
COST OF GOODS SOLD AND GROSS MARGINS
Cost of goods sold was $27.3 million for the second quarter 2001 compared to
$13.5 million for the second quarter 2000, an increase of $13.8 million. Cost of
goods sold was $53.7 million for the six months ended June 30, 2001 compared to
$24.5 million for the same period last year, an increase of $29.2 million.
The increases in the three months and six months ended June 30, 2001, were
the result of increased product sales volumes from the addition of
Cardizem-Registered Trademark-, Biovail Pharmaceuticals' branded products, and
generic product launches.
Gross margins based on product sales for the three months ended June 30,
2001 and 2000 were 78% and 70%, respectively, and for the six months ended
June 30, 2001 and 2000 were 77% and 70%, respectively. Our gross margins are
impacted period to period by sales volumes, pricing, product mix and
manufacturing volumes. The improvement in gross margins for the three months and
six months ended June 30, 2001 compared to the same periods last year primarily
reflected the positive impact of the inclusion of Cardizem-Registered Trademark-
to the product mix.
RESEARCH AND DEVELOPMENT
Research and development expenses for the second quarter 2001 and 2000 were
$13.7 million and $13.6 million, respectively. Research and development expenses
for the six months ended June 30, 2001 were $24.8 million and $25.1 million for
the same period last year. As a percentage of total revenue, research and
development expenses declined to 10% for the three months and six months ended
June 30, 2001 compared to 21% and 22% for the three months and six months ended
June 30, 2000, respectively.
Although research and development expenses have declined as a percentage of
total revenue, spending has remained consistent with the prior periods as we
continue to devote the necessary resources towards our product pipeline.
Research and development expenses reflected direct spending on the development
of branded generic and generic products, and on rapid dissolve products
utilizing our FlashDose-Registered Trademark- technology.
16
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS ARE EXPRESSED IN U.S. DOLLARS)
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the second quarter 2001
were $24.5 million, an increase of $10.7 million or 78% from $13.8 million for
the second quarter 2000. Selling, general and administrative expenses for the
six months ended June 30, 2001 were $51.3 million, an increase of $26.3 million
or 105% from $25.0 million for the same period last year. As a percentage of
total revenue, selling, general and administrative expenses declined to 18% and
20% for the three months and six months ended June 30, 2001, respectively,
compared to 21% and 22% for the three months and six months ended June 30, 2000,
respectively.
In dollar terms, the increase in selling, general and administrative
expenses was mainly related to the inclusion of Biovail Pharmaceuticals' sales
and marketing operation in our results for the second quarter and first half of
2001. In addition, with the acquisition of Cardizem-Registered Trademark- the
level of sales and marketing activity has expanded at both Biovail
Pharmaceuticals and Crystaal.
AMORTIZATION EXPENSE
Amortization expense for the second quarter 2001 was $10.8 million compared
to $1.0 million for the second quarter 2000. Amortization expense for the six
months ended June 30, 2001 was $21.5 million compared to $2.0 million for the
same period last year.
The increase in amortization expense reflected the amortization of product
rights and goodwill associated with the acquisition of DJ Pharma, and the
amortization of the Cardizem-Registered Trademark- brand name. In addition,
amortization expense for the second quarter and first half of 2001 includes the
amortization of the exclusive marketing rights to generic Adalat CC 30mg dosage
("Adalat") acquired from Elan Corporation, plc ("Elan") in December 2000. In
comparison, in the second quarter and first half of 2000 we recorded revenue
from Adalat product sales net of royalties paid to Elan.
NON-OPERATING ITEMS
INTEREST INCOME AND EXPENSE
For the second quarter 2001, net interest expense of $9.7 million was
comprised of interest expense of $10.3 million net of interest income of
$579,000, compared to net interest income of $2.4 million for the second quarter
2000, comprised of interest income of $7.7 million net of interest expense of
$5.3 million. For the six months ended June 30, 2001, net interest expense of
$22.2 million was comprised of interest expense of $23.3 million net of interest
income of $1.1 million, compared to net interest income of $2.1 million for the
same period last year, comprised of interest income of $11.5 million net of
interest expense of $9.4 million.
The increase in interest expense primarily reflected interest on advances
under our revolving term Senior Secured Credit Facility (the "Credit Facility"),
and the amortization of the discount on the obligations to Aventis for
Cardizem-Registered Trademark- and to Elan for Adalat. For the three months and
six months ended June 30, 2001, the non-cash amortization of these discounts
amounted to $3.2 million and $7.1 million, respectively.
17
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS ARE EXPRESSED IN U.S. DOLLARS)
The decrease in interest income reflected a decline in the average size of
our investment portfolio following the acquisitions of DJ Pharma and Intelligent
Polymers in the fourth quarter of 2000, and after the first two quarterly
instalment payments to Aventis and repayments made under the Credit Facility.
INCOME TAXES
Our tax rate was affected by the relative profitability of our operations in
various foreign tax jurisdictions. We recorded provisions for income taxes of
$3.3 million and $1.4 million for the three months ended June 30, 2001 and 2000,
respectively, and $6.1 million and $2.3 million for the six months ended
June 30, 2001 and 2000, respectively. These provisions reflected effective tax
rates on income before taxes, excluding non-deductible amounts, of approximately
8% and 6% for 2001 and 2000, respectively. The low effective tax rate reflected
that most of our income was derived from foreign subsidiaries with lower
statutory tax rates than those that apply in Canada. The benefit of tax losses
historically incurred by our Canadian operations has not been recognized for
accounting purposes to date. With our acquisitions of DJ Pharma and Fuisz
Technologies Ltd. ("Fuisz"), acquired in November 1999, we have experienced an
increase in our effective tax rate, as these operations earn income
predominately in the United States.
EXTRAORDINARY ITEM
The total consideration paid to repurchase our Senior Notes was
$141.0 million of which $16.0 million was an inducement premium to the holders.
As a result of this transaction, we replaced our high yield debt with
convertible debt at a significantly lower cost of borrowing. The extraordinary
item reported in the first quarter of 2000 included the premium paid, and
$4.0 million of deferred financing costs associated with the Senior Notes that
were written-off.
EBITDA
EBITDA, which is defined as earnings before interest, taxes, depreciation
and amortization, increased by $43.4 million or 157% to $71.1 million for the
second quarter 2001 from $27.7 million for the second quarter 2000. EBITDA
increased by $79.6 million or 161% to $128.9 million for the six months ended
June 30, 2001 from $49.3 million for the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, we had cash and cash equivalents of $68.3 million compared
to cash and cash equivalents of $125.1 million at December 31, 2000. In
December 2000, we arranged a $300 million Credit Facility that, subject to
certain covenants, permits us to borrow funds for general corporate purposes
including acquisitions. In June 2001, the Credit Facility was successfully
syndicated and our available line of credit under the Credit Facility was
increased to $400 million. All other material terms and conditions are
unchanged. The Credit Facility has received a BB- rating from Standard and
Poor's and Ba3 rating from Moody's Investor Services.
At June 30, 2001, we had total long-term obligations of $270.4 million,
including the current portion thereof. Long-term obligations consisted of
$135.0 million drawn on the Credit Facility, $82.7 million discounted amount
owing to Aventis for Cardizem-Registered Trademark-, $45.0 million discounted
amount owing to Elan for Adalat, and $7.7 million of other obligations. At
December 31, 2000, we had $438.7 million of long-term
18
BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS ARE EXPRESSED IN U.S. DOLLARS)
obligations, including the current portion thereof, which consisted of
$210 million drawn on the Credit Facility, $161.8 million discounted amount
owing to Aventis, $58.1 million discounted amount owing to Elan, and
$8.8 million of other obligations.
At June 30, 2001 and December 31, 2000, we had $300.0 million of 6.75%
Convertible Subordinated Preferred Equivalent Debentures, due March 31, 2025
("Debentures") outstanding. 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. Our Debentures have been
rated as B- by Standard and Poor's and B2 by Moody's Investor Services.
During August 2001, we entered into privately negotiated agreements with
certain holders of our outstanding Debentures. To date, these agreements
provided for the issuance of 5,982,541 common shares to those certain Debenture
holders upon their surrender of $165.5 million aggregate principal amount of
outstanding Debentures. In the third quarter 2001, we will record a charge to
income of $24.0 million which represents the market value of the additional
shares issued in excess of the number of shares which would have been issued
under the terms of the conversion ratio provided for in the indenture governing
the Debentures. Following the surrender of Debentures described above,
$134.5 million aggregate principal amount of Debentures remain outstanding.
We will benefit from the early surrender of Debentures immediately through
improved cash flows from lower interest payments, and in the future through
increased flexibility to meet our financing needs.
Cash provided by operating activities, after changes in non-cash operating
items, was $137.4 million for the six months ended June 30, 2001 compared to
$10.2 million for the same period last year. This increase reflected net income,
after adjustments for non-cash items, of $110.2 million for the six months ended
June 30, 2001 compared to $49.2 million for the same period last year. Changes
in non-cash operating items provided cash of $27.2 million for the six months
ended June 30, 2001 mainly through the collection of accounts receivable and
increases in accounts payables, accrued liabilities and deferred revenue, offset
by an increase in inventories mainly due to the inclusion of
Cardizem-Registered Trademark-. In comparison, changes in non-cash operating
items used cash of $39.0 million for the six months ended June 30, 2000 mainly
due to increases in accounts receivable and inventories, and decreases in
accounts payable and accrued liabilities.
Net cash used in investing activities was $31.8 million for the six months
ended June 30, 2001 compared to cash provided by investing activities of
$16.4 million for the same period last year. Additions to property, plant and
equipment were $28.9 million and $5.8 million in the six months ended June 30,
2001 and 2000, respectively. We settled $4.0 million of acquisition costs
related to Cardizem-Registered Trademark-, and acquired other intangible assets
for $10.0 million in the six months ended June 30, 2001, offset by
$11.4 million recovered from Elan as a reduction to the minimum license payments
otherwise payable under the Adalat marketing agreement. The net activity in
short-term investments provided cash of $4.2 million in the six months ended
June 30, 2000. Overall during fiscal year 2000, as our short-term investments
matured we
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BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS ARE EXPRESSED IN U.S. DOLLARS)
generally converted them into cash equivalents with original maturities of
90 days or less. In the six months ended June 30, 2000, we received proceeds of
$20 million on the disposal of Clonmel Healthcare Limited, a subsidiary of
Fuisz.
Net cash used in financing activities was $162.5 million for the six months
ended June 30, 2001 compared to cash provided by financing activities of
$242.8 million for the same period last year. Proceeds from the issue of common
shares on the exercise of stock options, through our Employee Stock Purchase
Plan, and from the exercise of warrants were $13.6 million and $7.1 million for
the six months ended June 30, 2001 and 2000, respectively. Net proceeds from the
concurrent offering in March 2000 were $95.7 million from the issue of common
shares, and $289.4 million from the issue of Debentures. A portion of these
proceeds was used to repurchase our Senior Notes for $141.0 million. In the six
months ended June 30, 2001, we repaid $75.8 million under our Credit Facility,
and $100.4 million of other long-term obligations, including the first two
quarterly instalments to Aventis of $42.5 million each, and $14.9 million to
Elan. In the six months ended June 30, 2000, we repaid the debt assumed on the
acquisition of Fuisz and other long-term obligations of $10.7 million. We
collected $2.3 million of the warrant subscription receivable in six months
ended June 30, 2000.
Overall, our cash and cash equivalents decreased by $56.9 million for the
six months ended June 30, 2001, and increased by $269.4 million for the same
period last year.
During August 2001, we entered into privately negotiated agreements with
certain holders of our outstanding warrants. To date, these agreements provided
for the exercise of 513,800 warrants to purchase 2,055,200 common shares. Each
warrant entitled the holder to purchase four of our post-split common shares at
an exercise price of $10.00 per share. As an inducement to those certain warrant
holders to exercise by an agreed upon time, we paid such warrant holders $2.00
per warrant exercised. In aggregate, we received proceeds of $19.5 million net
of the inducement cost of $1.0 million. Following the exercise of warrants
described above, 3,072,950 warrants to purchase 12,291,800 common shares remain
outstanding.
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to financial market risks, including changes in foreign
currency exchange rates, interest rates on investments and debt obligations and
equity market prices on long-term investments. We do not use derivative
financial instruments for speculative or trading purposes.
Inflation has not had a significant impact on our results of operations.
FOREIGN CURRENCY RISK
We operate internationally, however a substantial portion of our revenue and
expense activities and capital expenditures are transacted in U.S. dollars. Our
only other significant transactions are in Canadian dollars, and we do not
believe we have a material exposure to foreign currency risk because of the
relative stability of the Canadian dollar in relation to the U.S. dollar. A 10%
adverse change in foreign currency
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BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS ARE EXPRESSED IN U.S. DOLLARS)
exchange rates would not have a material effect on our consolidated results of
operations, financial position, or cash flows.
INTEREST RATE RISK
The primary objective of our investment policy is the protection of
principal, and accordingly we invest in high-grade commercial paper and
U.S. government treasury bills with varying maturities, but typically less than
90 days. External independent fund administrators manage our investments. As it
is our intent and policy to hold these investments until maturity, we do not
have a material exposure to interest rate risk. Therefore, a 100 basis-point
adverse change in interest rates would not have a material effect on our
investment portfolio.
We are exposed to interest rate risk on borrowings under our Credit
Facility. The Credit Facility bears interest based on LIBOR, U.S. dollar base
rate, Canadian dollar prime rate, or Canadian dollar Bankers' Acceptances. Based
on projected advances under the Credit Facility, a 100 basis-point adverse
change in interest rates would not have a material effect on our consolidated
results of operations, financial position, or cash flows. This risk is further
mitigated by our ability, at our option, to lock in a rate of interest for a
period of up to one year.
The interest rate on our Debentures is fixed and therefore not subject to
interest rate risk. Likewise, the imputed rates of interest used to discount our
long-term obligations to Aventis and Elan are fixed and therefore not subject to
interest rate risk.
EQUITY MARKET PRICE RISK
We are exposed to equity market price risks on our long-term,
available-for-sale investments in traded companies. We do not hold significant
investments in these types of securities, and therefore our equity market price
risk is not material. Therefore, a 10% adverse change in equity market prices
would not have a material effect on our financial position.
RECENT ACCOUNTING DEVELOPMENTS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001. Under SFAS No. 141, all business combinations
occurring after June 30, 2001 are to be accounted for under the purchase method
of accounting. Under SFAS No. 142, goodwill and other intangible assets deemed
to have indefinite lives will no longer be amortized, but will be subject to
annual impairment tests. Other intangible assets will continue to be amortized
over their estimated useful lives.
We will adopt SFAS No. 142 as of January 1, 2002 as required. We will
perform the first of the required impairment tests of goodwill and indefinite
lived intangible assets as of January 1, 2002. Any impairment loss for goodwill
and indefinite lived intangible assets arising from the initial application of
SFAS No. 142 is to be reported as resulting from a change in accounting
principle. We have not yet determined what the effect of adopting the provisions
of SFAS No. 142 will be on our financial position or results of operations.
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BIOVAIL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
IN ACCORDANCE WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(ALL DOLLAR AMOUNTS ARE EXPRESSED IN U.S. DOLLARS)
FORWARD LOOKING STATEMENTS
To the extent any statements made in this document contain information that
is not historical, these statements are essentially forward looking and are
subject to risks and uncertainties, including the difficulty of predicting FDA
approvals, acceptance and demand for new pharmaceutical products, the impact of
competitive products and pricing, new product development and launch, reliance
on key strategic alliances, availability of raw materials, the regulatory
environment, fluctuations in operating results and other risks. Many risks and
uncertainties are inherent in the pharmaceutical industry; others are more
specific to our business. Many of the significant risks related to our business
are described in Item 1 of our Annual Report on Form 20-F for the fiscal year
ended December 31, 2000 filed with the SEC.
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BIOVAIL CORPORATION
PART II -- OTHER INFORMATION
1. OPERATIONAL INFORMATION
The press releases issued by the Company subsequent to filing of Form 6-K on
May 30, 2001 were as follows:
a) On June 18, 2001, the Company announced a study in the Lancet reports
results of combination therapy of ReoPro-Registered Trademark- and
Retavase-Registered Trademark- (half-dose) for heart attack treatment.
b) On July 10, 2001, the Company and Celgene Corporation announced
d-methylphenidate filing in Canada.
c) On July 24, 2001, the Company reported positive
Cardizem-Registered Trademark- XL clinical results.
d) On July 31, 2001, the Company reported record second quarter financial
results.
e) On August 27, 2001, the Company announced the filing of a New Drug
Application for Cardizem-Registered Trademark- XL.
2. LEGAL PROCEEDINGS
For detailed information concerning legal proceedings, reference is made to
note 11 to the consolidated financial statements filed under Part I of this
quarterly report, and to Item 8.A. of the Company's Annual Report on
Form 20-F for the fiscal year ended December 31, 2000.
3. MATERIAL ISSUED TO SHAREHOLDERS
The material issued by the Company to shareholders are attached as the
following exhibits:
Exhibit 99.1 Second Quarter 2001 Interim Report for Canadian Regulatory
Purposes
Exhibit 99.2 Interim Report 2001 -- Second Quarter Report to Shareholders
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Biovail Corporation
By /s/ JOHN R. MISZUK
John R. Miszuk
Vice President, Controller
August 29, 2001
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