Biovail hubris exposed

NEW YORK (Fortune) -- So much for the grand conspiracy to bring down Biovail.

The big Canadian drug company agreed Friday to plead guilty to U.S. kickback and conspiracy charges. The decision, which closes out a federal investigation of the company's unusual actions in support of a 2003 drug launch, means Biovail (BVF) and a New Jersey-based subsidiary will pay a $24.6 million fine to avoid a court case that could have cost them future business with federal agencies.

But Biovail's plea bargain doesn't just close an ugly chapter in the Toronto-based company's history. It also pulls the rug out from under a multiyear quest by the company's former management, led by onetime CEO Eugene Melnyk, to blame an alleged conspiracy of hedge funds and research analysts for Biovail's financial and legal woes.

In February 2006, Biovail, then led by Melnyk, filed a $4.6 billion suit claiming 24 hedge funds and research analysts conspired to profit from the downward manipulation of its stock price. Among other things, Biovail's lawyers at Kasowitz, Benson, Torres and Friedman alleged that short-sellers and corrupt analysts manufactured rumors about a marketing program that paid physicians to prescribe the company's drugs.

Soon after, lawyers filed a class action modeled on that suit on behalf of shareholders, including lead plaintiff Marc Doctoroff, a longtime friend of Melnyk's.

The marketing program in question - Proving Cardizem LA through Clinical Experience, or PLACE - aimed to build physician awareness of Biovail's 2003 launch of a crucial product, the long-acting formulation of heart drug Cardizem. Skeptical hedge funds and research outfits charged that by paying doctors up to $1,000 for prescribing the drug for up to 15 patients, Biovail's program amounted to little more than bribery.

Rebutting these charges, and framing them as part of an organized conspiracy, was a substantial component of Biovail's February 2006 lawsuit. The company claimed at the time that it had been a victim of what it called a "whispering campaign" led by short-sellers who allegedly placed negative stories in the media.

"This whispering campaign ... reached an apex on or about July 20-21,2003, when The Wall Street Journal and [Barron's] published reports raising the identical (albeit unfounded) assertion that the PLACE clinical experience research study was nothing more than a method of paying doctors to write prescriptions," the lawsuit claimed.

Unfortunately for Biovail, federal prosecutors from Massachusetts didn't agree that the assertions were unfounded. Biovail, the U.S. attorney's office wrote in its press statement Friday, "did not design or implement the PLACE program in a way calculated to provide new or meaningful scientific data about whether Cardizem L.A. worked better than other available drugs." It added in settling charges against the company that the payments to doctors exceeded the "reasonable fair market value" of the physicians' services.

In announcing the settlement, Biovail's new chief, Bill Wells, noted that the agreement with prosecutors "eliminates significant exposure" the company would have faced if it had gone to court - including being forbidden from doing business with the federal government or being reimbursed by any of its agencies.

That's quite a different tone than the company struck back in 2003, when the program was first coming under fire. Back then Biovail, still under Melnyk's leadership, sharply defended its actions, claiming that PLACE program administrator Quintiles Transnational Corp. had guaranteed the legality of the program.

That claim would seem to be refuted by documents in a recently unsealed class action brought by a Canadian union pension fund. Biovail paid $138 million to settle that suit in December.

• A letter from Quintiles' general counsel to a Biovail lawyer said that not only had Quintiles never guaranteed the legality of the PLACE program, but contrary to Biovail's assertions in the media, the PLACE program was "conceived and designed by Biovail."
• An e-mail from Biovail's senior vice-president of corporate and strategic development, Rolf Reininghaus, to Ken Howling, VP of finance, argued Biovail shouldn't disclose the PLACE payments because of the risk that investors would conclude the company was "bribing physicians." In the body of an e-mail, he cut to the chase, writing, "This program is close to the line." But he added that "we want the stock to go up, not down."

Immediately following Friday's announcement of the plea, the lead firms behind the shareholder class action - Federman & Sherwood and Brodsky & Smith - submitted their requests to be removed from the case. The filing said the resignation was over a "difference of opinion" with the lead plaintiff Doctoroff over how to proceed in the case.

It has been a rough few weeks for Biovail as it seeks to put its controversial past behind it. In late March, the company settled a Securities and Exchange Commission civil complaint for $10 million over allegations of accounting and disclosure violations, without admitting or denying wrongdoing.

The SEC still has complaints in place against former CEO Melnyk and three other former Biovail officers, including former chief financial officer Ken Howling, ex-controller John Miszuk and former CFO Brian Crombie. Federal prosecutors from the Eastern District of Brooklyn also remain interested in Melnyk, according to company filings.

Biovail's regulatory and accounting problems under Melnyk's leadership have cost the company dearly, according to current board chairman Douglas Squires, who is fighting efforts by Melnyk to appoint a new slate of directors. He says the legacy litigation and regulatory problems from Melnyk's tenure have cost the company $150 million so far.

A spokesman for Melnyk said, "The remarks made in the Biovail proxy reflect the fact that Mr. Melnyk, as previously announced, is considering putting forth an alternate slate of Directors. Unfortunately, due to stringent proxy solicitation rules, he cannot comment on the specific issues Biovail has raised. However, his proxy, which will be filed shortly, will address many issues and will be available in due course."