A New Era or Is the Jig Up?

A friend of mine is a biochemist working in one of the U.S-owned pharmaceutical companies in Canada. She has been on her company’s research team for over ten years, but when I saw her over the weekend, she told me for the first time that her job might not be as secure as it used to be. Apparently, biotechnology and pharmaceutical companies are leaving Canada, either by being acquired, outsourced, or going through major corporate transformations.

The loudest warning signal went off when Biovail, Canada’s largest public pharmaceutical company threw in the towel and backpedaled into a form of an investment trust, of all things. Disregard for a moment the fact that investment trusts are currently very low on the popularity list in Canada. Becoming an investment trust of any kind is still a strange alternative for a titan that used all cash flow to pay for new acquisitions.

Since 1996, when Biovail brought to market “Tiazac,” the heart medication, the company grew by acquiring other firm’s drugs or rights to distribution. The list is quite long. There is “Cardizem” developed by Aventis, “Zovirax” from GlaxoSmithKline, or “Vasotec” from Merck.

The latest gem is “Wellbutrin XL,” developed by GlaxoSmithKline, which hauled in 42% of Biovail’s revenues in 2005. Note that while most of the work on Wellbutrin XL was done by GlaxoSmithKline, Biovail came out with a formulation enabling patients to take the pill safely once a day. It was a great way to cut a piece of this multibillion dollar cake for Biovail.

So, why would a company with a chutzpah like that want to cut its sales force, stop looking for profitable takeover targets, dump excess cash into dividends and pay outstanding debt? And to become, for all intents and purposes, an income trust of sorts?

For years, analysts were curious about Biovail answering just one question–what will happen to the company once there are no more blockbuster drugs to buy and once generics overpower its patents? The answer was what no one wanted to hear–nothing, one huge nothing! The kind of nothing in which there are no growth prospects, just a stagnant, boring cash cow that’s good only for milking (pun completely intended!).

Perhaps going out like this, with a squeal and a big dividend is not such a bad way to go. But, for Canadian biotechnology and pharmaceutical industry, it could point to dramatic changes in the investment landscape–with large head offices disappearing, labor force being outsourced overseas, and even more disturbing, with major scientific projects moving away from us. Well, perhaps we cannot have it all!