Financial Jungle

The market tormenting me. The extra turbulence over the last few business days had taken everyone prisoner, except that they allowed the Biovail stock to revive 10% from its 52-weeks low. D’oh! I was so close in securing a juicy 10% dividend yield, my Achilles’ heel in investing, but the stock got away from me, at least for now.

Immediatelly after FDA’s thumbs down on Biovail’s studies on its formulation of bupropion, “a key component of a new antidepressant”, the market punished Biovail mercilessly sending the stock 37% lower to $17. In the process, it lifted the yield to a remarkable 8.8%.

This drug was supposed to fill the revenue hole left by Wellburtrin XL, a time-release antidepressant which accounted for 44% of Biovail’s revenues. Wellburtrin XL comes in 2 versions: the 300- and 150-milligram dosage. The 300-milligram version is already off-patent, while the 150-milligram version will face copy-cat competitions from generic producers. According to Biovail’s second-quarter financial report, generic competitions had swallowed half of the Wellburtrin XL revenues. That’s a 20% decline of total revenues.

Is the correction overdone? I think so. At the very least, I believe the stock has absorbed much of the decline and there’s plenty of value left in the post-Wellburtrin era. I know this isn’t a growth story like my superstar generic, TEVA. But, if the stock is indeed sufficiently below its intrinsic value, who will say no to free money?

Where’re the values? For starters, the company has $870 million in the bank in 2007 Q1. It means when you buy Biovail for $18/share, $5.40 is cash in the bank, so you’re really paying less than $13 for the pharmaceutical business. With the market being so volatile these days, patient investors might snap this up for a couple bucks less. Imagine one third of each Biovail share being backed by hard cash! I’d be stunned if the stock falls to anywhere near the vicinity of $5. Even cash flush stocks like Microsoft has only $2.49 on a $28.26 share.

The question that most critics enjoy picking on is can Biovail sustain the $1.50 dividend distribution policy in light of their top seller, Wellbutrin XL, going off-patent. For the sake of argument, let’s assume the misery by eliminating all revenues from Wellbutrin XL. (In real life, Wellbutrin XL should chug along residual revenues as with their other legacy drugs.) This drug is responsible for 44% of the 2006 revenues. Just to be on the conservative side, I’ll half their 2006 operational cash flow from $522 million to $261 million. Subtract $45 million for CapEx and $160 million for dividends, and that leaves $56 million of free cash, which serves as another margin of safety in my valuation.

Based on that, Biovail should sustain their dividend policy, but please help correct any flaws in my rudimentary analysis.

Possible Upsides:

• FDA’s eventual approval of bupropion.
• Successful foray into the multi-billion-dollar, global sexual-dysfunction market.
• According to their 2006 report, they have 10 new drugs in their product pipelines: 5 for central nervous system disorders, 2 for pain management, 2 for cardiovascular disease, and 1 for gastrointestinal disease.

One Objection I Heard:

Biovail relies heavily on outside collaboration/alliances with other companies, research institutes and projects for current R&D. Not having expertise in house can provide limitations over control.

Even with an army of in-house Ph.D.’s, expertise can be surprisingly difficult to find, according to a report by McKinsey Quarterly, Do You Know Where Your Experts Are - Companies need a new approach to finding their ellusive experts.

Early in the project, it needed someone with deep technical knowledge of a particular protein. We spent weeks looking for an expert — calling HR, asking around the office, scanning personnel records. Finally, we concluded the expert didn’t exist. Three days later, I’m in an elevator complaining about this to a colleague, when the woman next to me turns and says, “I wrote my doctoral thesis on that protein. What do you need to know?”

Take Procter & Gamble for example. Despite having a $1.7 billion R&D budget and 1,200 Ph.D.’s in-house, the company enjoyed a 45% success rate by outsourcing its most challenging problems to Innocentive, a market place setup by Eli Lilly to bring together solution seekers and 80,000 scientists from across the globe. I don’t view having a small R&D team as necessary a handicap for Biovail. In fact, it’s good risk management to selectively align with drug-development companies to license, develop, manufacture and market promising drugs to the market.

As always, I’m not your financial advisor. I’d be interested if anyone can point out any pitfalls with Biovail.

Disclosure: I don’t own Biovail shares, although I might start nibbling below $17.