Biovail Corp is to take over U.S-based Valeant Pharmaceuticals International in a complex deal that positions the enlarged firm to better serve the growing baby boomer market.

Worth roughly $3.3 billion, the deal announced early on Monday will take advantage of tax breaks and other savings to create a company that retains the Valeant name and is run by Valeant's existing chief executive, Michael Pearson.

Shareholders of Biovail, Canada's largest publicly owned pharmaceutical company and maker of such drugs as the Wellbutrin depression treatment, will own 50.5 percent of the new firm. Valeant shareholders will own 49.5 percent.

The merger will create an even stronger player here in Canada, and allows Biovail to take a giant step forward and complete its transition to a new type of company, said Cheryl Reicin, who leads the technology and life sciences practice groups at Torys LLP, one of Canada's top legal firms advising on mergers and acquisitions.

The deal will create a company with cash flow of some $900 million and a focus on products for central nervous system disorders and dermatology -- Valeant products include drugs for skin cancer and epilepsy.

The deal values Biovail shares at a 15 percent premium, based on stock prices over the last 10 trading days, and brings together a major drug-delivery company in Biovail with a major drug developer and manufacturer in Valeant.

The merger creates an entity that will tap the market for neurological drugs for ailments that affect an aging population, like Alzheimer's and Parkinson's.

JOB CUTS COMING

Pearson said the new company expects to cut 15 percent to 20 percent of its combined workforce of about 4,400. Merging to be a Canadian company lets it obtain a tax friendly corporate structure just as Valeant's tax credits were set to expire.

We had to do this sooner rather than later from a standpoint of gaining this tax rate, Pearson told Reuters in an interview on Monday.

He said the combined company's tax rate is expected to be in the 10 percent to 15 percent range, Pearson said, and the company planned to use its increased cash flow on share buybacks and tuck-in deals.

Biovail's focus since the early 1990s was to take existing orally administered drugs and apply drug-delivery technologies to improve their effectiveness, such as controlled release, better absorption and disintegration.

Responding to changes in the industry, Biovail revamped its business model in 2008 to focus on developing drugs that target central nervous system disorders, although it still maintains a broad portfolio of proprietary drug-delivery technologies.

Valeant stockholders will get a one-time special cash dividend of $16.77 per share and 1.7809 shares of Biovail common stock in exchange for each Valeant share they own.

That amounts to $42.77 for each Valeant share, using Friday's close of Biovail shares on the New York Stock Exchange. Valeant shares closed at $45.87 on Friday.

Biovail shares rose 14.5 percent to C$17.02 on the Toronto Stock Exchange, while Valeant shares were up 2.3 percent to $46.90 in New York.

The new Valeant's Board of Directors will consist of 11 members, including five Biovail representatives, five Valeant representatives and one independent Canadian resident.

The combined company will pay an additional $1 per share dividend to all stockholders of the new entity, but does not plan to pay dividends after that, the companies said.

ValueAct Capital, Valeant Pharmaceuticals' largest stockholder, said it would vote in favor of the deal and would be the largest stockholder of the merged entity. The deal is expected to close before the end of 2010.

LEVERAGE

The companies said the new Valeant will be able to leverage complementary product lines and operations in specialty central nervous system, dermatology, Canada and emerging markets/branded generics.

It would have had a total revenue of $1.75 billion for the 12 months ended March 31.

The companies have secured a commitment of $2.8 billion to finance the deal through a term-loan facility from Goldman Sachs Bank, Morgan Stanley and Co, and Jefferies and Co.

The new Valeant will be headquartered in Mississauga, Ontario, and will remain a Canadian domiciled corporation, listed on both the Toronto and New York Stock Exchanges. The U.S. headquarters will be determined after the deal is closed.

The deal will add to the combined company's earnings within the first 12 months. The new Valeant expects to generate at least $175 million in annual cost savings in the second year.

Valeant Pharmaceuticals is being advised by Goldman Sachs and Co and Jefferies and Co, while Morgan Stanley and Co is advising Biovail.

(Additional reporting by Sakthi Prasad, Lewis Krauskopf, Paritosh Bansal and Solarina Ho in Toronto; Editing by Mario Di Simine)

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