For two major rea-sons, Mississauga, Ont.-based Biovail Corp. is a star that has faded. But the firm is counting on its competitive advantages to help it pull through.

Biovail’s efforts to commercialize products outside Canada on its own didn’t work out. As well, the company is facing strong competition from a generic version of its anti-depressant Wellbutrin XL, which has accounted for about 40% of Biovail’s revenue since the drug’s launch in September 2003.

Besides retaining its Canadian commercialization and distribution business, Biovail’s strategy is “to focus on research and development to drive growth,” says CEO Douglas Squires. Biovail plans to spend $500 million over the next four years on R&D, up from the previously planned $350 million. (All dollar figures are in U.S. dollars.)

The company has two comparative advantages, says Squires: “First is the depth and breadth of our portfolio of drug-delivery technologies. Biovail has more than 20 advanced DDTs that we can leverage to improve the clinical effectiveness of medicine already on the market. This diversity of technologies allows us greater flexibility in terms of pipeline candidates, and it allows us to overcome most of the industry’s delivery challenges.

“Second, we have the demonstrated ability to take these technologies from the concept stage right through to commercial-scale manufacturing of pharmaceutical products that incorporate our oral drug-delivery technologies.”

Biovail’s R&D has been expanded to include products that combine different classes of drugs and a renewed focus on generics that are difficult to manufacture. The company focuses on medicine taken orally for cardiovascular disease, central nervous system disorders and pain management. The DDTs include controlled release, which gradually releases the medicine and allows for once-a-day doses, and a formulation that allows pills to be taken without water.

Commercialization outside of Canada is done with partners, as was the case with Wellbutrin XL, which is distributed by Britain-based GlaxoSmithKline PLC.

Biovail signed an agreement on Dec. 20, 2006, with Atlanta-based Sciele Pharma Inc. to promote among U.S. physicians its Zovirax ointment and cream for treating the herpes virus.

Analysts are happy about the strategy, which includes a big increase in dividends and elimination of Biovail’s almost $400 million in debt by the end of April.

Another piece of good news is that GSK has been granted a marketing licence for Wellbutrin XL in the Netherlands. Regulatory agencies in 21 other countries consider Wellbutrin XL approvable and GSK expects licences to be granted shortly, with sales starting in April.

But only a few analysts are recommending Biovail’s stock, and those recommendations are cautious.

David Lickrish, an analyst in the global specialty pharmaceutical division of First Albany Capital Inc. in New York, has a “buy” rating on Biovail, although not a “strong buy.” His 12-month target price is $24.65, vs the $21 it was trading at in mid-February.

Biovail won’t give many details about its R&D programs because that could tip off its competition, which has led to much debate about the merits of some programs, says Lickrish. Despite that, he’s optimistic, noting there could be considerable upside if some of Biovail’s combined medicines are successful. He points to medical literature that doctors have been combining anti-depressants with good results.

One of Biovail’s projects is to combine Wellbutrin XL with other classes of anti-depressants. An-other is the combination of pain reliever Tramodol with a non-steroidal anti-inflammatory drug.

RBC Capital Markets Inc. is also cautiously optimistic, with an “outperform” rating on the stock. RBC notes its $23 target price represents a 25% discount to the current specialty pharma median price earnings multiple of 18.5, based on 2007 earnings. RBC thinks this is appropriate, given the risk associated with the restructuring and lack of visibility in Biovail’s R&D pipeline.

Some brokerage firms have a “hold” or “neutral” rating on Bio-vail, but their 12-month targets are similar to RBC’s. These include New York-based Credit Suisse Securities (USA) LLC, at $22.50, and TD Newcrest and UBS Securities Canada Inc. , both of Toronto, at $23.

“Biovail’s growth strategy seems vague and its drug-development model appears to have lost step with key changes in the end market,” says a TD Newcrest research report released Jan. 29. It notes the anemic sales of Ultram ER, a pain reliever. Launched in February 2006, Ultram’s market share is stuck in the mid-teens. Sales were $34.6 million, just 5% of total product sales, in the first nine months of 2006.

@page_break@TD Newcrest cautions inves-tors that even though the increase in R&D spending is welcome, the “market uptake for modestly differentiated reformulated products will continue to wane in coming years, pressuring returns on drug delivery R&D in the process.”

For the first nine months of 2006, Biovail earned $88.6 million on revenue of $762.9 million, vs a profit of $116.5 million the previous year on revenue of $647.9 million. Operating cash flow after net change in non-cash working balances for the first nine months of 2006 was $286.9 million, up from $278.5 million a year earlier.

However, the company posted a $56.5-million loss in the third quarter, ended Sept. 30, 2006, as a result of a pretax $143-million write-down of assets and $46.8 million in contract-loss contingencies.

There will be restructuring charges in the fourth quarter related to severance costs as a result of the shutdown of its U.S. sales force. No details have been provided.

Eugene Melnyk, Biovail’s executive chairman, is under investigation by the U.S. Securities Exchange Commission and the Ontario Securities Commission for failing to report sales of Biovail stock. This does not involve illegal insider trading, but it threw a chill on the stock when the SEC first announced its investigation in 2004.

In February 2006, Biovail brought a lawsuit for stock market manipulation against 22 hedge funds, investment research firms and analysts. The company is seeking $4.6 million in damages.

There are also legal proceedings regarding products, mainly related to proposals for generic versions of Wellbutrin XL, but some involving generic versions of Tiazac and Cardizem, used to treat hypertension and angina.

The SEC and OSC are also investigating Biovail’s accounting practices, which have been a source of controversy. At the end of 2002, Biovail acknowledged using aggressive accounting for the $94 million it paid Toronto-based Solvay Pharma Inc. for the U.S. distribution rights for Teveten, a hypertension-relief product. Biovail put the full US$94 million paid as the value of the licence on its balance sheet rather than the usual approach of 20% less.

Melnyk owns 14% of the 160.4 million shares outstanding. He stepped down as CEO in 2004 but retains his executive chairman role. IE