For a guy who "retired" last year, Eugene Melnyk is awfully busy. It's a sunny Friday in late August, but he's not in a T-shirt and flip-flops, sipping a beer in front of a plasma TV screen at Bert's, the watering hole and "official Caribbean headquarters of the Ottawa Senators" that he owns near his beachfront home in Barbados. Instead, the 49-year-old Toronto-born pharmaceutical magnate—and hockey team owner, racehorse breeder and omnivorous fan of just about every sport under the sun—is in New York City. He's sitting at the dining room table of his Upper West Side condo, dressed in black slacks and a black Senators golf shirt, keeping one eye on his BlackBerry while he gives his take on the business battles he's fought over the past six months.
Melnyk's wife, Laura, wants him to take a holiday. Indeed, next Monday, he's to leave on a week-long fishing trip to Northern Quebec with Laura and their two young daughters, Anna and Olivia. Melnyk will apparently be out of BlackBerry range, "but I think I can get a sat [satellite] phone," he says with a grin when Laura is out of earshot. Either that or maybe he can drive 30 kilometres or so every day to retrieve e-mail and phone messages.
There will be lots of them. Consider what this retiree has on the go. First and foremost, there's the question of what to do next now that he's lost his proxy fight to oust the board and management of Biovail Corp., the Mississauga-based drug maker and distributor he established in the 1980s and built into a billion-dollar-a-year company. He's still Biovail's largest shareholder, with a 12% stake. In August, Melnyk apparently tossed in his cards in the proxy battle. But he's not ruling out another round. "If they don't perform, I'll be right there," he vows.
Next on the list are the charges filed by U.S. regulators and the Ontario Securities Commission in March, both zeroing in on Biovail's aggressive accounting in 2003. Then there's a grinding lawsuit filed by Jerry Treppel, a U.S. stock analyst who was fired after crossing swords with Melnyk in 2002. Treppel has recently won a court ruling allowing him to conduct a forensic search of Melnyk's laptop computer to see if Melnyk pressured the bank to have him fired. Also still in the courts is a $4.6-billion lawsuit Melnyk and Biovail filed in 2006 against several U.S. hedge funds and analysts, accusing them of conspiring to drive down Biovail's share price and profit from short-selling the stock (all currency in U.S. dollars except where noted).
It's not all acrimony, however. Melnyk is on the verge of securing a Major League Soccer team for Ottawa, where he hopes to replicate the success of Toronto FC. The Senators open their season in September, and he figures they can win the Stanley Cup. Last season, the Senators won 13 of their first 14 games, an NHL record, but were then plagued by injuries. The season culminated in a demoralizing first-round playoff loss—and that after they went all the way to the Cup final the year before. "We've kept the core team together," says Melnyk. "We have everything we need."
On the Biovail front, as part of his campaign, Melnyk is launching Trimel Biopharma. It will pursue a strategy similar to Biovail's in its "golden years" in the 1990s, when he was chairman and Bruce Brydon was CEO: making improved versions of both name-brand drugs and generics. Biovail carved out a lucrative niche in the global pharmaceutical market by reformulating drugs to get into patients' bodies faster, often with just one pill a day, rather than several. "Some of these new drug delivery systems are just space age," declares Melnyk. "Within five years, we'll say the delivery of insulin by injection was barbaric."
As it has been throughout Melnyk's career, this entrepreneurial drive can be inspiring and effective. It can also be annoying and frustrating, even to his own shareholders, because Melnyk won't let even the slightest criticism from analysts or regulators pass. If Melnyk was a sports star rather than a sports owner, he'd be John McEnroe, one of the best tennis players of his generation, but most often remembered for his blow-ups with officials. Melnyk, in fact, was among the top tennis players in Canada as a teenager. "Then I went to the States," he says, "and the level of competition was a lot higher." These days, Melnyk looks more like a team's equipment manager than an athlete—pudgy and jovial, although more compact than he sometimes appears in photographs.
Given all his sporting sidelines, why can't Melnyk just take his lumps and sit back with his 18 million Biovail shares, still worth about $11 (Canadian) each even at their recent, historically low levels? At that price, his stake is worth $200 million (Canadian), part of a personal fortune estimated at $700 million (Canadian). Those shares are also still earning a fat $1.50 apiece in annual dividends that management, trying to win support from shareholders during the proxy fight, promised it would maintain. Not pausing to savour that irony, Melnyk says a complex set of events pretty much forced him to step back into the fray.
Just after 9 a.m. on Dec. 11, 2006, Melnyk was on the balcony of the New York Stock Exchange with Biovail's longest-serving employee, finance specialist Myrna Escandor, and a handful of others, getting ready to ring the opening bell to celebrate the 10th anniversary of Biovail's NYSE listing. At this sweet moment, Melnyk's BlackBerry rang. "This is one time I'm not gonna answer it," he recalls thinking.
But after the ceremony, colleagues told him that the phone call was from Ocala, Florida, where Melnyk owns a 1,000-acre thoroughbred horse farm, and where his older brother, Zenon, was in hospital suffering through the final stages of pancreatic cancer. Melnyk and Laura flew down immediately. "I had to pull the plug," he concludes sadly. At that point, he says, he decided to retire from Biovail at its next annual meeting. "I said, 'I'm done.'"
At the AGM in Toronto in May, 2007, Melnyk fought back tears. "I can point to a dozen successful business deals in the last dozen years, but I have a hard time remembering a dozen quality days at home in the last six months,'' he told shareholders.
Melnyk had also just received a couple of sharp kicks from regulators. A few days before, Biovail had disclosed that it was under investigation by the SEC concerning its 2003 financial statements. A few days after the meeting, Melnyk settled a separate dispute with the Ontario Securities Commission. He agreed to pay $1 million (Canadian) and to not act as a Biovail director for a year, for failing to report more than 5,000 trades in Biovail shares made between 2002 and 2004 by four trusts that he had established in the Cayman Islands.
The trades were made by Roger Rowan, a Toronto brokerage firm president and a former Biovail director, who had trading authority over the accounts. At press time, his case with the OSC was still ongoing. At a hearing this past June, Rowan's lawyer argued that Melnyk or the trustees in charge of the accounts should have reported the trades. Melnyk won't discuss the details of any past or current regulatory proceedings against him.
Melnyk's ride into the sunset didn't last very long. Biovail's share price on the NYSE (most of the trading action in the stock takes place on U.S. exchanges) had moved up from about $20 to $25 in the first half of 2007. He figured it was headed above $30. "I was going to sell my stock through an offering," he says. But in July, the U.S. Food and Drug Administration turned down Biovail's application for approval of a new version of bupropion, the active ingredient in the company's popular antidepressant, Wellbutrin XL. The new version offered added safety, in large part because its dissolution isn't accelerated if patients drink alcohol. FDA delays are common, but flat-out non-approvals worry investors. Hence Biovail's share price plunged by more than 10% in one day.
The slide continued over the next four months, and Melnyk blames Doug Squires—the veteran pharmaceutical executive he picked to succeed him as Biovail CEO in 2004—for aggravating it. After the FDA's July announcement, Squires and other company executives repeatedly said they were confident the drug would be approved. Melnyk says that was like telling the regulators they made a mistake. "It's the stupidest thing they ever could say," he argues. (Biovail executives declined to respond to Melnyk's criticisms of management, or to discuss the proxy battle. In a letter, the company only looked forward and summarized major new initiatives, which we'll return to.)
Things didn't go any better when Biovail requested a review of the FDA decision. The agency responded in November by announcing that it was conducting not a 60-day Class 1 review of the new version of bupropion, but a minimum six-month Class 2 review. The stock plunged 11% that day to an eight-year low of $14.51. That slashed the value of Melnyk's stake to about $260 million, compared with roughly $450 million when he officially left the company at the end of June, and just over $1 billion at the all-time-high share price of close to $56 at the end of 2001.
Melnyk was agitated, to say the least. He says he met with Squires and Biovail's lead director, Bill Wells, last December and told them, "It ain't working." Biovail hadn't won a major drug approval under Squires, and none appeared imminent. A drug company with a clogged product pipeline is dead in the water. Melnyk says he told the duo they had two options: Fess up to product delays and deal with them, or take the company private. If they chose the latter, he told them, "Depending on the price, I'm either a buyer or a seller."
After that meeting, Melnyk says he started beating the bushes and soon found "a top, top, top private equity firm" prepared to buy the company. Does this firm have a name? Melnyk says he can't divulge it, but he brought the proposal to Squires and Wells in February. Their response was that the board had hired outside advisers to conduct a comprehensive review of Biovail's strategic options. Isn't a strategic review usually a prelude to a search for a buyer to take over the company (something Melnyk says he had)? "Uh, hello?!" he snorts.
At that point, Melnyk concluded that he had to publicly disclose what he was up to. "My reporting problems are well known," he says sardonically, and his lawyers told him that, as a significant Biovail shareholder, U.S. laws required him to report even a change in his intentions. He did that in an open letter to Biovail's board that he filed with the SEC on Feb. 27. He wrote that he'd "lost confidence" in the board and management, and that he was looking at several options, including finding a private equity partner to buy the company, selling all or some of his shares, or seeking to turf the board and replace it.
That ignited the fireworks. In March, Melnyk decided to mount a proxy challenge at Biovail's annual meeting, scheduled for June 25. (A shareholder can challenge the board of directors, and propose a rival slate, by sending a proxy document to other stockholders and attempting to win their votes at the annual meeting.)
Melnyk phoned former Biovail CEO Bruce Brydon in Arizona—"Bruce and I hadn't talked in six years"—and Brydon immediately agreed to head Melnyk's rival slate of directors. But on March 24, U.S. and Canadian securities regulators dealt Melnyk another blow. The SEC filed civil fraud charges, and the OSC filed similar allegations in Canada, accusing Biovail, Melnyk and several other former executives of accounting manipulations, part of a "corrupt scheme" to meet the company's quarterly and annual earnings forecasts.
Many of the charges date back to a now-infamous truck accident near Chicago on Oct. 1, 2003, that killed eight people on a bus and destroyed a shipment of Wellbutrin XL pills, a then-new version of Biovail's popular antidepressant. In news releases and a conference call with analysts right after the accident, Melnyk and Biovail said between $10 million and $20 million worth of pills on the truck were destroyed. That, they said, would help explain any dip in Biovail's quarterly earnings. But the following March, the company admitted that just $5 million worth were lost.
The charges weren't a surprise—analysts had expected them for years—and Melnyk vowed to vigorously defend himself. But Biovail immediately announced that it had agreed to settle with the SEC for $10 million, admitting no wrongdoing. That quick settlement spared the company a potentially long and costly legal battle, yet it also made it harder for Melnyk to argue that no one did anything illegal.
Meanwhile, the proxy battle heated up. In late
April, Biovail announced that Wells had been appointed CEO, and Squires chairman. In May and June, both sides deluged shareholders with news releases, newspaper ads and Internet postings.
A lot of the barbs were personal. Melnyk and Brydon vowed to recapture Biovail's "entrepreneurial spirit," and pointed out that when Brydon was CEO, from 1995 to 2001, the share price climbed from a split-adjusted 67 cents a share to $55.60. Under Squires, from 2004 until this past spring, the price declined from about $19 to less than $12. But in a release titled "Biovail shareholders should disregard the latest misinformation from Eugene Melnyk," management pointed out the obvious: Guess who was CEO from 2001 to 2004, when the shares slid from $55 to $19?
Sniping aside, there were also serious, substantive differences between the two sides. Each outlined a long-term strategy to revitalize Biovail. Melnyk and Brydon proposed to concentrate on making and selling "difficult to manufacture" generic drugs, and moving into so-called biosimilars—biologically based treatments that have the same effect as drugs.But Wells argued that that approach was an exercise in nostalgia, an outmoded "basic reformulation, drug delivery, life-cycle-extension type of strategy" that had "run out of gas" in the marketplace.
Instead, management proposed focusing on what it said is a $70-billion global market for drugs for central nervous system (CNS) disorders such as Parkinson's disease and multiple sclerosis. In his letter to Report on Business magazine, Wells says the company will spend $600 million (Canadian) in R&D through 2012 as it completes the development of its existing pipeline of drugs, and will then "leverage its core capabilities in drug delivery and formulation" and focus them on CNS. The goal, he says, "is to become the 'partner of choice' for all development-stage pharmaceutical companies active in these CNS markets."
Melnyk retorted that such a radical shift in strategy would be "pharmaceutical suicide," and wouldn't solve Biovail's biggest problem—no new product in the pipeline—any time soon.
Claude Camiré, an analyst with Paradigm Capital in Toronto, says both Melnyk and management have some good ideas, but neither side has identified any specific drugs they'd introduce. CNS is indeed a promising niche area, he says, but Biovail has little experience in it. "Developing new drugs requires huge capital, longer clinical trials and management expertise," says Camiré. "At this point, potential drugs are just that."
On the other hand, simply turning back the clock to the strategies of the 1990s wouldn't work either, says Camiré. More than 80% of Biovail's existing drugs, he says, are "in the mature stages of their life." (Even pharma giants like GlaxoSmithKline, with $45 billion a year in revenue, are struggling to develop new drugs these days.) Nor is Biovail a likely takeover candidate, despite relatively healthy cash flow and the absence of long-term debt on its balance sheet. Camiré says the company is just too small and has too odd a mix of products for it to be taken out by a Big Pharma rival. The bottom line: "We don't have a screaming buy on the company because there's nothing going on," he says.
Judging from Biovail's moribund share price, investors weren't very impressed by either side's proposal, and they still aren't. The stock has been stuck below $12 since early June, and the consensus recommendation among Bay Street and Wall Street analysts is "hold."
In a proxy fight, a lot depends on lobbying and schmoozing, rather than just the substance of the dispute. But Melnyk has never hobnobbed much on the Street. He's always revelled in his image as the outsider-made-good. He has earned a lot of money and has no qualms about enjoying it in style—the sprawling home in Barbados, the hockey teams (the Senators and the Mississauga St. Michael's Majors of the OHL), the private jet, the racehorses and sizable charitable donations.
Both Melnyk's ego and his pay packet have often drawn fire from institutional investors and governance activists. Melnyk was both chairman and CEO of Biovail from 2001 to 2004, and in the years 2000, 2001 and 2002 he collected a total of $226 million (Canadian) by cashing in stock options. As this summer's proxy fight heated up, many institutions undoubtedly worried that a Melnyk-controlled slate would be running the company again.
Melnyk's many blow-ups at analysts over the
years have also strained his relations with the Street. Just about any time anyone issued a negative report about Biovail in the 1990s or early 2000s, he'd mutter that short sellers were spreading misinformation. The $4.6-billion lawsuit Biovail filed in 2006 alleges a sweeping conspiracy by 22 defendants to drive down the share price.
Given that history, Melnyk says he wasn't surprised in mid-June when an influential proxy advisory firm, ISS/Risk Metrics, recommended that Biovail shareholders vote for management's slate. At that point, he says, he knew he would lose: "The key is to know when to fold them." But Melnyk didn't do that. He just had to tweak Biovail's nose one more time.
The morning of the annual meeting on June 25, Melnyk's side withdrew 19 million votes, out of 161 million shares outstanding. That left the meeting short of the 51% quorum level, but Biovail's directors didn't take it lying down. They met quickly and lowered the threshold to 25%; the management slate was elected. Melnyk cried foul and challenged the move in court. On July 16, the judge ruled that Biovail would have to rerun the meeting; the company chose Aug. 8 as the date. But on July 28, Melnyk indeed folded and said he was withdrawing his slate of directors.
So is this now, indeed, the retirement Melnyk says he wanted? Sort of. There is Trimel Biopharma to launch, as well as the soccer team. He's also excited about investments in two other small companies: Pure Cell Technologies, which makes medications out of plants, and Fusion Beauty, a cosmetics manufacturer. There are the hockey teams to oversee—including watching all 82 regular-season Senators games, "and 16 playoffs, if you're lucky," he says. Add as many as 60 televised Majors games to that, plus several horse races on many days—"they don't take long, though, only about 2 1/2 minutes." As for the company he created, Melnyk says that, for the moment, "I'm just another Biovail shareholder." If they've learned anything about Melnyk, Wells and the rest of the company's management won't bank on that.
"HANDS-ON" MELNYK GETS SENATORS' VOTE OF APPROVAL
The Ottawa Senators, a back-from-the-grave business story, have been as much fun for Eugene Melnyk in recent years as Biovail has been frustrating. He bought the team for $125 million (Cdn.) after the 2002-'03 season, in which the Senators finished first in the NHL, advanced all the way to the Stanley Cup semifinals—and entered bankruptcy protection from creditors. Owner Rod Bryden, the Ottawa software magnate, just didn't have deep enough pockets. Ottawa faced losing its team to a new U.S. home.
Starting with the glitzy appearance by the Eagles at the 2003-'04 home opener, Melnyk has made big changes to just about every aspect of the operation. Some were substantial, like replacing coach Jacques Martin with Bryan Murray in 2004, after the Sens lost a playoff series to the Toronto Maple Leafs for the fourth time in five years. Others were symbolic, like changing the team logo from a profile of a Roman general to a more aggressive, full-facial view that Melnyk said "represents strength and determination." Senators captain and star right-winger Daniel Alfredsson says Melnyk is a "very much more hands-on" owner than Bryden was—but that's a good thing. Whether the team is up or down, he says, it helps to have the boss visit the dressing room, "going through the same emotions we are."
What's the difference between a hands-on team owner and an autocratic one? Senators president Roy Mlakar, who also worked for Bryden, says that individuals bring a passion that corporate owners, such as Maple Leaf Sports & Entertainment, lack. Melnyk says he admires the New York Yankees' George Steinbrenner and Mike Ilitch, owner of the Detroit Red Wings, because they get results on the field and the ice, not just on the bottom line.
The Senators' finances have certainly improved dramatically under Melnyk. In Forbes magazine's annual financial ranking of NHL teams, the Sens moved up from 27th place in 2002 to 14th last year, nearly doubling in value from $95 million to $186 million.
© The Globe and Mail
