THE IN UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK ____________________________________ x : MARINA J. CHRAPKO, individually and : on behalf of all others similarly situated, : : Plaintiff, : : vs. : : BIOVAIL CORPORATION, EUGENE N. : MELNYK, and BRIAN H. CROMBIE, : : Defendants. : : ____________________________________x
Civil Action No.
CLASS ACTION COMPLAINT Plaintiff Marina J. Chrapko (Plaintiff), individually and on behalf of all others similarly situated, alleges the following for her Class Action Complaint (the Complaint), based upon the investigation conducted by her attorneys, except for those allegations which pertain to Plaintiff, which allegations are based upon personal knowledge. The investigation conducted by Plaintiffs attorneys included, among other things, consultation with an accounting expert; and a review and analysis of press releases, news reports, conference call transcripts, analyst reports, interview transcripts, and public filings by Biovail Corporation with the United States Securities and Exchange Commission (the SEC). Nature of the Action 1. This is a class action on behalf of the purchasers of the common shares of Biovail
Corporation (Biovail) between February 7, 2003 and October 30, 2003 (the Class Period or the Class) for violations of the federal securities laws. Biovails common shares are traded on the New York Stock Exchange and on the Toronto Stock Exchange under the symbol BVF. Excluded
from the Class are Defendants, all partners, officers and/or directors of any of Defendants or their subsidiaries, members of Defendants immediate families, any entity in which any Defendant has a controlling interest, and the legal representatives, heirs, successors or assigns of any such excluded person (the Class). Jurisdiction and Venue 2. This Court has jurisdiction over this action pursuant to Section 27 of the Securities
Exchange Act of 1934, 15 U.S.C. 78aa (the Exchange Act) and 28 U.S.C. 1331 and 1337. The claims asserted in the Complaint arise under and pursuant to Sections 10(b) and 20 of the Exchange Act (15 U.S.C. 78j(b), 78t) and Rule 10b-5 (17 C.F.R. 240.10b-5) promulgated by the SEC. Pursuant to the effects test of extraterritorial jurisdiction, this Court has subject matter jurisdiction over the claims of: (a) all investors who purchased or acquired Biovail securities traded on U.S. markets and (b) all investors based in the United States who purchased or acquired Biovail securities regardless of where those securities traded. Pursuant to the conduct test, this Court also has subject matter jurisdiction over the claims of foreign class members who purchased or acquired Biovail securities traded on the Toronto Stock Exchange. There was, and still is, but a single market for Biovail securities, which traded in tandem on the New York Stock Exchange and the Toronto Stock Exchange. That market was defrauded by defendants conduct, causing extensive effects both in this country and abroad. 3. Venue is proper in this District pursuant to Section 27 of the Exchange Act and 28
U.S.C. 1391(b) because a substantial part of the events or omissions giving rise to the claims complained of herein occurred in this District.
2
4.
In connection with the wrongs alleged herein, Defendants used the instrumentalities
of interstate commerce, including the United States mails, interstate wire and telephone facilities, and the facilities of the national securities markets. Defendants false and misleading statements all were disseminated within the United States through the means and instrumentalities of interstate commerce, including, but not limited to, the mails, interstate telephone communications and the facilities of a national securities exchange. Biovail regularly filed false and misleading reports and financial statements with the SEC in the United States, including Form 20-F annual reports and Form 6-K quarterly reports, and issued press releases concerning its business, operations and financial results. The Parties 5. Plaintiff purchased Biovail common shares during the Class Period, as set forth in the
Certification of Named Plaintiff attached hereto. 6. At all times relevant to this action, Defendant Biovail was a corporation organized
under the laws of the province of Ontario, Canada. The Companys principal executive offices are located at 7150 Mississauga Road, Mississauga, Ontario, Canada, and the Companys agent for service in the United States is CT Corporation System, 111 Eighth Avenue, New York, New York 10219. . 7. At all times relevant to this Complaint, Defendant Eugene N. Melnyk (Melnyk)
was employed by Biovail as its Chief Executive Officer, was a member of Biovails Board of Directors and served as the Chairman of Biovails Board of Directors. 8. At all times relevant to this Complaint, Defendant Brian H. Crombie (Crombie)
was employed by Biovail as its Senior Vice President and Chief Financial Officer. 9. Defendants Melnyk and Crombie are sometimes hereinafter collectively referred to as
the Individual Defendants. 3
10.
As a result of the Individual Defendants positions with the Company, they possessed
the adverse undisclosed information more particularly described herein from internal corporate documents, communications with other corporate officers and employees, attendance at management and Board of Directors meetings and committees thereof and reports and other information provided to them in connection therewith. 11. It is appropriate to treat the Individual Defendants as a group for pleading purposes
and to presume that the information conveyed in the Companys public filings, press releases and other publications as alleged herein are the collective actions of this narrowly defined group of defendants. Throughout the Class Period, each of the Individual Defendants participated in the conference calls with stock market analysts that took place immediately after the issuance of the Companys press releases announcing the Companys financial results. Each of the above officers and directors of the Company, by virtue of his high-level position with the Company, was directly involved in the day-to-day operations of the Company at the highest levels and was privy to confidential proprietary information concerning the Company and its business, operations, and financial condition and performance, as alleged herein. The Individual Defendants were involved in drafting, producing, reviewing, and/or disseminating the false and misleading statements and information alleged herein, were aware or recklessly disregarded that the false and misleading statements were being issued by the Company and approved or ratified these statements, in violation of the federal securities laws. As officers and directors and controlling persons of a publicly-held company whose securities were, and are, registered with the SEC pursuant to the Exchange Act, traded on the New York Stock Exchange, and governed by the provisions of the federal securities laws, the Individual Defendants each had a duty to disseminate promptly accurate and truthful information with respect to the Companys business, operations and financial condition and performance and to correct any previously issued statements that had become materially misleading 4
or untrue, so that the market price of the Companys publicly-traded securities would be based upon truthful and accurate information. The Individual Defendants misrepresentations and omissions during the Class Period violated these specific requirements and obligations. The Individual Defendants participated in the drafting, preparation, and approval of the various public and shareholder and investor reports and other communications complained of herein and were aware of or recklessly disregarded the misstatements contained therein and omissions therefrom, and were aware of their materially false and misleading nature. Due to their positions of control and authority as officers and/or directors of the Company, the Individual Defendants were able to control and did control the Company and the content of the various SEC filings, press releases and other public statements pertaining to the Company during the Class Period. Accordingly, each of the Individual Defendants is responsible for the accuracy of the public reports and releases detailed herein and is therefore liable for the representations contained therein. 12. Each of the Individual Defendants is liable as a participant in the fraudulent scheme
and course of business that operated as a fraud or deceit on purchasers of the Companys securities, by disseminating materially false and misleading statements and/or concealing material adverse facts. The scheme deceived the investing public regarding the Companys business and financial results, and caused Plaintiff and other members of the Class to purchase Biovail securities at artificially inflated prices.
Fraud on the Market and the Presumption of Reliance 13. Plaintiff and the members of the Class are entitled to the presumption of reliance
established by the fraud-on-the-market doctrine. At all times relevant to this Complaint, the markets 5
for Biovails publicly traded securities were efficient markets for the following reasons, among others: a. Biovails securities met the requirements for listing and were traded on the
New York Stock Exchange and the Toronto Stock Exchange, highly efficient and automated markets; b. c. As a regulated issuer, Biovail filed periodic public reports with the SEC; Biovail was followed by numerous securities analysts employed by major
brokerage firms, which wrote reports that were distributed to their sales forces and certain customers of their respective brokerage firms. Each of these reports was publicly available and entered the public marketplace; d. Biovail regularly issued press releases, which were carried by national and
international news wires. Each of these releases was publicly available and entered into the public marketplace; e. The market for Biovail securities digested current information regarding the
Company from the publicly available sources described above and the market price of Biovail securities reflected the effect of such information. 14. Under these circumstances, all purchasers of the Companys securities during the
Class Period suffered similar injury through their purchase of common shares at artificially inflated prices and a presumption of reliance applies. Plaintiff and the Class relied upon the representations by Defendants or upon the integrity of the market system in setting the price of the securities based upon the misrepresentations made by Defendants.
6
Class Action Allegations 15. Plaintiff brings this action on their own behalf and as a class action, pursuant to Rule
23(a) and Rule 23(b)(3) of the Federal Rules of Civil Procedure, on behalf of a class (the Class) of all persons who purchased the publicly traded common shares of Biovail from February 7, 2003 through and including October 30, 2003 (the Class Period), and who suffered damages as a result of the violations of the federal securities laws alleged herein.. 16. The members of the Class are so numerous that joinder of all members of the Class is
impractical. While the exact number of Class Members is unknown to the Plaintiff at this time and can only be ascertained through appropriate discovery, Plaintiff reasonably believes that there are hundreds, if not thousands, of members of the Class located throughout the United States. As of December 31, 2002, approximately 158,120,144 Biovail common shares were issued and outstanding. 17. Plaintiffs claims are typical of the claims of the other members of the Class because
the damages suffered by Plaintiff and all Class Members arise from and were caused by the same or similar misrepresentations and omissions made by or chargeable to Defendants as alleged herein. Plaintiff does not have interests antagonistic to, or in conflict with, the Class. 18. Common questions of law and fact exist as to all members of the Class and
predominate over any questions affecting solely individual members of the Class. Among the questions of law and fact common to the Class are: a. alleged herein; b. whether Defendants misrepresented and/or failed to disclose material facts in whether the federal securities laws were violated by Defendants acts as
the Companys press releases, annual reports, quarterly reports, and conference calls, as more particularly described below; 7
c.
whether the market price of the Companys securities were artificially inflated
during the Class Period due to the material misrepresentations and/or nondisclosures complained of herein; and d. whether the members of the Class have sustained damages, and, if so, the
proper measure of such damages. 19. Plaintiff will fairly and adequately protect the interests of the other members of the
Class, and Plaintiff has retained counsel competent and experienced in class and securities litigation to further ensure such protection and intend to prosecute this action vigorously. 20. A class action is superior to other available methods for the fair and efficient
adjudication of this controversy. The Class is so numerous and geographically dispersed that it would be impracticable for each member of the Class to bring a separate action or to be joined in an individual action. The individual damages of any member of the Class may be relatively small when measured against the potential costs of bringing this action, and thus make the expense and burden of this litigation unjustifiable for individual actions. In this class action, the Court can determine the rights of all members of the Class with judicial economy. 21. There will be no difficulty in the management of this litigation which would preclude
its maintenance as a class action. The names and addresses of the record owners of the securities purchased during the Class Period are available from the Companys transfer agent. Notice can be provided to such record owners and all Class Members by a combination of published notice and first-class mail, using techniques and a form of notice similar to those customarily used in class actions arising under the federal securities laws. Factual Background 22. Biovail is a pharmaceutical company that is engaged in the formulation of
pharmaceutical products utilizing advanced oral drug delivery techniques, clinical testing, 8
registration, manufacturing, sale and promotion of pharmaceutical products targeting the cardiovascular, central nervous system, pain management and niche therapeutic areas. 23. In a press release dated December 11, 2002, the Company announced that it had
acquired Pharma PASS LLC, an Irvine, California company, and Pharma PASS SA, a company based in France (collectively, Pharma PASS Purchase). In the December 11, 2002 press release, the Company stated that, as part of the Pharma PASS Purchase, Biovail was acquiring an immediate, material economic interest in . . . . a recently launched generic version of Prilosec (omeprazole). . . . Pharma PASS, the inventor and developer of this product, developed the only generic version of Prilosec found not to infringe the original products patent. Defendants Material Misrepresentations During The Class Period 24. On February 7, 2003, Defendants issued a press release entitled, Biovail Corporation
Provides 2003 Guidance. In the February 7, 2003 press release, Defendants stated that total revenue for 2003 (including and royalty co-promote revenue) was expected to grow approximately 30%, and that fully diluted earnings per share were expected to increase by 30% or more in 2003 versus 2002 and be in the range of $2.25 and $2.35. The February 7, 2003 press release was issued by Defendants prior to the opening of the securities markets. 25. On March 4, 2003, Defendants issued a press release announcing Biovails financial
results for the fourth quarter ended December 31, 2002. In the press release, Defendants reported total revenues for the fourth quarter of $238.7 million (a 34% increase from the revenues reported for the fourth quarter of 2001), fourth quarter diluted earnings per share (excluding certain extraordinary items) of $.60 per share, and represented that [t]hese favorable results are primarily driven by, inter alia, the Companys participating interest in the gross profit of sales of a generic version of Prilosec. In the press release, Defendants further reported that the Companys reported results included co-promotion, royalty and license revenue of $45.6 million for the fourth quarter 9
(reflecting an $29.4 million increase from the fourth quarter of 2001), and further represented that the increase was primarily due to the Companys interest in the gross profit of the sales of a generic version of Prilosec during the fourth quarter of 2002. In commenting on these financial results, Defendant Melnyk was quoted as stating that Biovail continues to achieve earnings growth in excess of $30%. 26. On April 29, 2003, Defendants issued a press release announcing Biovails financial
results for the first quarter ended March 31, 2003. In the press release, Defendants reported total revenues for the first quarter of $ 191.4 million (a 23% increase from the revenues reported for the first quarter of 2002), first quarter net income of $ $63.0 million (an increase of 19% from the net income reported for the first quarter of 2002), and first quarter diluted earnings per share of $.39 (an increase of 22% from the $.32 per share for the first quarter of 2002). In the press release, Defendants attributed the Companys increased revenues to the Companys interest in the gross profit on the sales of a generic version of Prilosec acquired in the 2002 fourth quarter, and reported that the Companys first quarter co-promotion, royalty and licensing revenue was $61,876,000. Defendant Melnyk further represented in the press release that the Companys first quarter performance provided the Company with confidence that we will meet or exceed our objective of 30% earnings per share growth for 2003. 27. On or about May 21, 2003, Biovail filed its annual report for the year ended
December 31, 2002 with the SEC on Form 20-F. In the 20-F, Defendants stated, inter alia: a. In December 2002, we acquired two of a group of PharmaPASS companies
for approximately $178 million. . . . Through this agreement, we acquired . . . . an economic interest in two currently marketed products, omeprazole (Prilosec) for the treatment of depression, and Tricor. b. Royalty revenue is recognized in accordance with the contractual agreements 10
and when the Company has no future obligations pursuant to the royalty fee, and [r]oyalties primarily arise on sales of the products we developed or acquired and from our interests in certain licensed products of Pharma PASS. c. Royalty revenue increased in 2002 compared to 2001 due to the contribution
from our interest in the gross profit on sales of a bioequivalent version of Prilosec. . . . We expect the level of co-promotion, royalty and licensing revenue in 2003 to be higher than 2002 due to the contribution from our interest in the gross profit on sales of a bioequivalent version of Prilosec; d. Royalty revenue increased in the first quarter of 2003 compared to the first
quarter of 2002 due to the contribution from our interest in the gross profit on sales by a third party of a bioequivalent version of Prilosec; 28. On or about May 30, 2003, Biovail filed its report for the first quarter ended March
31, 2003 on Form 6-K with the SEC, which repeated the Companys revenue, royalty revenue, net income, and earnings per share financial results contained in the Companys April 29, 2003 press release. 29. On July 29, 2003, Defendants issued a press release announcing Biovails financial
results for the second quarter ended June 30, 2003. In the press release, Defendants reported total revenues for the second quarter of $217.3 million (a 17% increase from the revenues reported for the second quarter of 2002), second quarter net income $83 million (a 33% increase from the net income reported for the second quarter of 2002), and second quarter diluted earnings of $.52 per share (a 33% increase from the second quarter of 2002). Defendants further represented in the press release that co-promotion, royalty and licensing revenue increased over 150% to $55.9 million for the second quarter, and that [t]he increase in this revenue line item is due to Biovails on-going economic interest in the sales of a generic version of Prilosec. 11
30.
Following the issuance of the press release, Defendants conducted a conference call
on July 29, 2003 with stock market analysts and investors. During the July 29, 2003 conference call, Defendants also repeated and reiterated the total revenue and earnings per share estimates for 2003 that were originally made on February 7, 2003, and reconfirmed on April 29, 2003. Defendants further represented during the conference call that Biovail was upwardly revising its previously issued royalty and co-promotion revenue financial guidance by $20 million due to the fact that our economic interest and the gross profits associated with the sales of the generic version of Prilosec continue to exceed our expectations. 31. On or about August 29, 2003, Biovail filed its report for the second quarter ended
June 30, 2003 on Form 6-K with the SEC, which (i) repeated the Companys revenue, net income, and earnings per share financial results contained in the Companys July 29, 2003 press release, (ii) represented that [r]oyalty revenue increased in the second quarter of 2002 compared to the corresponding periods of 2003 due to the added contribution from our participating interest in the gross profit on sales by a third party of a bioequivalent version of Prilosec (omeprazole), and (iii) stated that third party sales of omeprazole are exceeding our previous expectations. As a result, for the balance of 2003 we anticipate that our co-promotion, royalty and licensing revenue will be approximately $20 million above our previous expectations. 32. On October 3, 2003, Defendants made a partial, but still materially incomplete,
disclosure by issuing a press release entitled, Biovail Provides Guidance on 2003 Third Quarter Results. In the press release, Defendants announced that Biovial would not meet the revenue and earnings estimates that had been previously issued by Defendants, and disclosed for the first time that contrary to Defendants representations during the Class Period the distributor of the generic version of Prilosec had the contractual right to impose price reductions on a retroactive basis, and was a primary factor that had caused the Company to be unable to meet the revenue and earnings 12
estimates: Biovail has an economic interest in the gross profits derived from the sales of a generic version of omeprazole. The distributor of this generic version of omeprazole product has announced that it will provide significant price reductions on a retroactive basis to wholesalers. . . . .Biovails second half 2003 financial guidance assumed that additional competition for generic omeprazole would seriously erode the financial benefit to the Company s interest in the gross profits of this product. However, since Biovail shares in a percentage of the gross profit of this product, significant credits issued by the distributor during the third quarter 2003 could have a negative effect on Biovails participating interest of up to $15 million in net income. As well, it can be anticipated that there could be a fourth quarter 2003 negative income impact of up to $15 to $20 million. 33. On October 3, 2003, following the issuance of the October 3, 2003 press release, Defendants
conducted a conference call with stock market analysts and investors, in which Defendants further reported that the third quarter 2003 impact of the lost royalty revenue in connection with the retroactive price reductions was approximately $20 million, which would reduce net income by $7 million (or between $.04 to .$05 of earnings per share). 34. On October 30, 2003, the Company issued a press release entitled, Biovail Reports
Third Quarter 2003 Financial Results. In the press release, Defendants reported co-promotion, royalty and licensing revenue of $30.8 million for the third quarter 2003, and stated that: The Company has an economic interest in the Gross Margin or a generic version of Prilosec that is distributed under license in the U.S. In the third quarter, additional generic competition entered the market. Due to the additional competition, the licensee offered rebates to wholesalers. These rebates have the affect of reducing Gross Margin and had a negative impact to Biovails third quarter ...