All Business

WHEN TO KISS AND MAKE UP

Eugene Melnyk is Bay Street’s comeback kid. So why fight old battles?

STEVE MAICH November 7 2005
All Business

WHEN TO KISS AND MAKE UP

Eugene Melnyk is Bay Street’s comeback kid. So why fight old battles?

STEVE MAICH November 7 2005

WHEN TO KISS AND MAKE UP

All Business

Eugene Melnyk is Bay Street’s comeback kid. So why fight old battles?

STEVE MAICH

EUGENE MELNYK HAS IT ALL. His hockey team, the Ottawa Senators, is off to a blistering start and is an early favourite to win the Stanley Cup. His prized racehorse, Flower Alley, won the Travers Stakes this year and ran in the prestigious Breeder’s Cup. And to top it off, his company, Biovail Corp., is back in favour after suffering through one humiliating setback after another in 2003 and 2004.

Biovail’s stock has almost doubled in the past six months, and last week the company

got another boost from the U.S. Food and Drug Administration, with a positive patent ruling on its pain reliever Tramadol ER. Every time Biovail goes up by a dollar, Melnyk gets another $22.7 million richer.

Melnyk, meanwhile, has become a full-on believer in the ways of open management, preaching with the zeal of the converted. He handed Biovail’s reins to a new CEO last year, and signed up a handful of respected directors. The company’s regulatory filings are now a model of transparency. Last month, it even presented a case study on corporate governance to a Toronto financial seminar. It was like getting weight loss advice from Burger King.

This is clearly not yesterday’s Biovail. All those pesky concerns about excessive pay, dubious accounting and a lame product pipeline seem like a distant memory these days, and Bay Street analysts are finally letting Melnyk out of the doghouse. Last week,

Merrill Lynch raised its rating on Biovail to “buy” after more than a year stuck at “neutral.”

Of course, not everything is champagne and roses. The Ontario Securities Commission is still investigating Biovail’s past accounting practices, and it’s still being chased by U.S. class action lawyers over a series of missteps that sent the stock plunging a couple of years ago. But these are mere footnotes to the company’s remarkable renaissance. So, with all this going for him, you can’t help but wonder why Melnyk is still wrestling with a ghost of Biovail’s past.

Chances are most casual observers have long since forgotten about Jerry Treppel, the ex-Bank of America analyst who got into a very public spat with Melnyk and Biovail

back in 2002, and wound up losing his job over it. But Melnyk can’t forget.. .or won’t.

The short version of the twisted saga goes like this: in 2002, Biovail got into a scuffle with U.S. regulators over attempts to patent a blood pressure drug. Treppel told a reporter the company’s conduct in the patent dispute “looked like fraud.” As you might imagine, the company took umbrage at his use of the F-word, and complained to Bank of America. Around the same time, it was leaked to newspapers that Treppel owned stock in a rival company. Just who was responsible for leaking this information is in dispute—Treppel says Biovail blabbed it to destroy his reputation, the company denies it. (Full disclosure: I wrote stories about the dispute at the time, but didn’t get any leaks.)

Nevertheless, stories circulated that Trep-

pel was in a conflict of interest. B of A put him on indefinite leave even though it appears he complied with all of the bank’s conflict guidelines. And pretty soon, the analyst found himself under investigation by the Securities and Exchange Commission as well as the New York attorney general.

Treppel eventually resigned from B of A, and sued Biovail for libel, for implying he was a crooked analyst with an axe to grind. Melnyk countersued, alleging Treppel was involved in a vast conspiracy with unethical money managers, spreading false rumours to sink Biovail’s stock and make money on

short sales. And that’s where we stand today— the case is still grinding through the courts, with both sides claiming the other ruined their reputation, and demanding compensation (using numbers that require several commas to keep track of all the zeroes).

Treppel says Melnyk’s conspiracy theory is hogwash, and it does seem a tad far-fetched. But just because you’re paranoid doesn’t mean the world isn’t out to get you. Melnyk complained for years about shady short sellers plotting against his company, and for all anyone knows, Melnyk may really be the aggrieved party here. But what of it?

There comes the time in every fight when you must consider the cost of victory. The way things are heading, the Treppel lawsuit will mean opening Biovail up to a discovery process that could crawl through every corner of the company’s history and accounting. It’ll mean rehashing the days when Biovail’s integrity was a matter of daily media speculation, and dredging up questions about the disappointing profits, patent squabbles, and the ways Biovail dealt with unflattering analyst coverage. In short, it’ll create the kind of fertile ground for short sellers and skeptics that Melnyk has worked so diligently to eliminate over the past year.

Treppel has already lost his job, and has spent the past three years fighting to reclaim his reputation. He has little left to lose by making this process as painful as possible for Biovail. Melnyk, on the other hand, can afford to make peace. He’s the same guy who collected $122 million in total compensation in 2001, making him Canada’s highest-paid executive. It would cost a fraction of that to put this whole affair in the past.

The OSC investigation will be hard enough to deal with. Is another messy legal battle really what’s best for Melnyk’s long-suffering shareholders? Right now, a dignified peace looks a lot better than a pyrrhic victory. I?il

Read Steve Maich’s weblog, “All Business,” at www.macleans.ca/allbusiness

TREPPEL has lost his job, and has spent three years trying to reclaim his reputation. He has little to lose by making the court battle as painful as possible.