BVF Biovail Corp

Days before shareholders of Canada's Biovail Corp. (BVF) and Valeant Pharmaceuticals International (VRX) are scheduled to vote on their merger agreement, two members of the California Assembly have called upon the U.S. Securities and Exchange Commission and the Department of Justice to investigate the deal.

In letters to the SEC and DOJ seen by Dow Jones, California Assembly Members Kevin de Leon and Jared Huffman raise concerns about the newly-merged company's potential to avoid paying taxes and resulting job losses in California.

"I hope that you will expeditiously review this merger to determine whether it violates U.S. law or federal regulations," wrote de Leon in his letter.

Biovail is based in Canada but has a subsidiary in Barbados that allows it to take advantage of a tax treaty between the two countries that has afforded Biovail a tax rate in the range of 6%-7%.

"The new company says it will save $300 million--this is money that will effectively be lost to California and the overall U.S. economy," de Leon wrote.

The companies have previously said the $300 million in projected "synergies," to be reached in full by 2012, are unrelated to taxes and will come from reductions in general expenses, research and development, and to some degree cost of goods sold. Valeant's chief executive, Michael Pearson, recently said in a letter to employees that the corporate tax rate for the new company is expected to be 15% by the end of 2012.

Jobs was another issue raised in the letters. Huffman wrote that with the new company being based in Canada, most of the job losses will be in California, including 130 positions at a Valeant plant in his own district.

Biovail and Valeant have said 25% of the combined North American workforce will be cut, but haven't provided an exact number yet, nor have they said if most of the losses will be in Canada or the U.S.

Both Assembly members also note a potential conflict in the deal's financing, which requires Valeant to pay a $1.25 billion dividend prior to the merger which is being financed by $2.8 billion in new debt. They say the new debt is being financed by the same group of investment dealers who provided fairness opinions on the transaction to both sides.

Valeant Pharmaceuticals was advised by Goldman Sachs and Jefferies and Co, and Morgan Stanley advised Biovail. The financiers of the debt couldn't immediately be confirmed.

"I appreciate the important work done by the SEC, and I urge you to use your respective authorities to ensure that this proposed merger meets all legal and regulatory standards," de Leon wrote.

Officials from Valeant and Biovail couldn't be reached for comment.

Shareholder meetings for each company are scheduled to take place Monday concurrently in Toronto and New Jersey.

Until now, the merger deal has received nothing but positive reviews and has sent the shares of both companies soaring--Biovail in particular.

Dow Jones previously reported that outgoing Biovail CEO Bill Wells, who will become the merged company's non-executive chairman, stands to collect a $25 million payout from severance, options, and performance-based units.

Although the deal is structured as Biovail purchasing Valeant to retain Biovail's efficient tax structure, and therefore isn't a change in control from Biovail's standpoint, the board of Biovail treated the transaction as a change in control as far as employment benefit plans "in light of the relative parity in holdings of shares of the combined company between former Biovail shareholders and former Valeant stockholders," among other reasons, according to a regulatory filing.

However, the merged company will keep the Valeant name.

-By Andy Georgiades, Dow Jones Newswires; Andy.Georgiades@dowjones.com

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