By TIM KILADZE, PAUL WALDIE
Saturday, April 21, 2018
They arrived in droves, hundreds of mourners wearing bright blue scarves and dresses and T-shirts, coming together to commemorate the man who built an empire.
Six days after Barry Sherman and his wife, Honey, were found dead in their Toronto home, scores of employees from Apotex Inc., the Canadian drug giant that Mr. Sherman founded, gathered at a convention centre on the outskirts of Toronto. There, on a drab December morning, they joined thousands of others at a memorial service for the popular couple.
It was a public spectacle. The Prime Minister attended. Prominent members of Toronto's Jewish community did, too.
Yet away from the limelight, Apotex employees were reeling. Mr. Sherman built their company from the ground up. Its identity, its ethos, was intertwined with his own.
"We are like a family," a solemn employee told reporters. Many of his colleagues wore apparel in the same blue hue as Apotex's signature logo, including T-shirts bearing a powerful message: "We will continue your legacy."
For staffers, life hasn't gotten any easier in the four months since that mournful day. Although the initial shock has dissipated, the upheaval throughout Apotex's far-flung operations hasn't let up.
The company is struggling in the face of challenges that have gripped the generic-drug industry worldwide and led to thousands of layoffs, including hundreds at Apotex - so far.
Not only has the company lost its guiding force, but Mr. Sherman left no ownership succession plan.
Mr. Sherman's stake is likely to be divided among several relatives whose intentions aren't clear. Some employees also hold shares, according to court filings, complicating the company's control even more.
A new management team has been put in place and there are already plans to sell divisions and cut back operations. But there's no guarantee any of that will be successful and the future of one of Canada's premier companies is now in doubt.
Mr. Sherman's death has already set off a round of internal turmoil. Within weeks of the memorial, chief executive officer Jeremy Desai abruptly resigned after 15 years at the company, including nearly four as CEO. Mr. Desai had been enmeshed in a messy lawsuit alleging that he had stolen trade secrets from arch rival Teva Pharmaceutical Industries Ltd., with the help of a U.S.-based Teva executive with whom he'd had an affair.
Without a clear No. 2 to take the reins, the company reached for a familiar hand: Jack Kay, a former Apotex CEO, who agreed to come out of quasi-retirement at age 77.
While Mr. Kay was a familiar face in a fragile time, his steadying influence didn't last long.
A few weeks after his return, Mr. Kay sent an e-mail to Apotex's senior leaders telling them to brace for a significant restructuring. However, it is made clear that someone younger will be charged with implementing the revamp.
The man most likely to do that is Jeff Watson, a Kay protégé and the company's new president and chief operating officer.
Mr. Watson faces a complicated task. Mr. Sherman's legacy looms large at Apotex, even after his death. At the company's office complex in north Toronto, a banner with his portrait hangs over the reception desk.
But Apotex must be re-tooled, which means some of the founder's work will have to be undone. Despite the company's status and its track record of success that made Mr. Sherman a billionaire, it faces serious headwinds.
The generic-drug industry is under siege, and Mr. Sherman and Mr. Desai made key decisions in recent years that have hampered the company's performance.
In a rare interview, the new president is candid about the need for change. Almost everything seems to be on the table. "A year from now, our geographic footprint will look different. A year from now, our supply chain will look different," Mr. Watson said. Apotex's drug portfolio is also likely to shrink.
Altogether, it amounts to a "tighter, more focused approach" - a new strategy that was quietly taking shape last summer and fall. Mr. Sherman's death put things on hold, but the initiative has resumed. Recent changes have included staff cuts at Apotex's hub in Brantford, Ont., about an hour west of Toronto, and putting the company's European division up for sale.
The goal, in Mr. Watson's words, is simply to establish a "sustainable business that can stand on its own two feet."
DISRUPTION FROM ALL ANGLES
Five months before he died, Mr. Sherman finally accepted that the status quo wouldn't suffice. Generic-drug makers used to mint money - with operating profit margins around 30 per cent - but those days were vanishing.
Apotex became a Canadian champion by reverse-engineering the formulations of brand name drugs and then selling them for much lower prices once their patents expired. With his doctorate from the Massachusetts Institute of Technology and brief history in the drug business thanks to an uncle, Mr. Sherman founded the company in 1974 and drove the business hard. He oversaw almost every operation and served as lead scientist, mixing the chemicals that formed the essence of new drugs. By the late 1990s, Apotex had operations around the world and held 40 per cent of Canada's generic market.
In the past few years, most of the institutional drug purchasers in the key market of the United States have either consolidated or formed partnerships. The three largest buyers now make up roughly 90 per cent of drug purchasing in the country, giving them incredible negotiating power over producers.
As well, the U.S. Food and Drug Administration plans to keep increasing the number of generic drugs it approves for sale. The hope is that the greater supply will drive drug costs lower - and new generic drug manufacturers in low-cost countries such as India are desperate to tap the U.S. market.
Generic drug prices had been falling 7 per cent to 8 per cent annually in the United States, and in late 2017 analysts at Credit Suisse projected even more carnage, with prices perhaps soon falling 10 per cent to 12 per cent annually.
"The worst has not yet played out, and returns should decline sharply," they wrote last October.
Similar pressures exist in countries with public health-care systems - including Canada - albeit for different reasons. Chiefly, cash-strapped governments are desperate to save money as their baby boomers age, so they target drug costs. As of 2016, average generic drug prices in Canada had declined to half of what they were a decade ago, according to Canada's Patented Medicine Prices Review Board.
Last year proved to be a turning point. By December, Sandoz, one of the world's largest genericdrug manufacturers, said it was considering exiting its oral dose business in the United States. A week later, Teva announced plans to lay off more than a quarter of its work force and suspended its dividend.
Asked to explain the shake-up on a conference call, Teva CEO Kare Schultz said the generic price wars had gotten ugly. "My guess is that not only Teva but other manufacturers have ended up competing to the bottom, where it's not really sustainable or profitable," he said.
As this global upheaval unfolds, Apotex is particularly vulnerable. The company has developed several business lines, but it is still predominately a producer of oral-dose drugs. In the months before he died, Mr. Sherman had been spending most of his time reworking old concoctions because many weren't robust enough for the current market - they were originally engineered to be stored in the types of pill bottles commonly seen behind Canadian pharmacy counters, but in emerging markets, drugs are typically sold in blister packs that aren't protected by a hard shell. Apotex also needed to make its pills more suitable for what are known as Zone IV climates, which have different temperatures and humidity levels.
"Sandoz, Teva, Mylan - they all lost volumes to the Indians," Ronny Gal, a pharmaceutical equities analyst at Sanford C. Bernstein & Co., said. "It's just that some of these other companies actually had other businesses to fall on, and Apotex did not."
Because the company is privately held, it's not clear how badly Apotex has suffered financially.
But in March, London-based Hikma Pharmaceuticals PLC, whose generics division has a very similar profile to Apotex, announced a $1.1-billion writedown on this unit. Hikma's latest financial reports show the division pulled in one-third of total revenue last year, but generated only 5 per cent of profit.
Complicating things further at Apotex was Mr. Sherman's pride and his combative personality.
Under his leadership, Apotex amassed a huge drug portfolio, but he could be reluctant to cast off poor performers. In his eyes, the drugs were his babies, his inventions. Once, when management signed off on halting some production, Mr. Sherman furiously defended the products and launched into a diatribe about their history and his designs, according to someone who was at the meeting.
Mr. Kay alluded to this trait in a speech at the memorial service.
"Barry would stick to his guns on anything that was important to him, even if the economics would say to let things go," he said. "The concept of letting go was just not anywhere in his DNA."
Mr. Sherman also had pet projects, such as developing a triplecombination drug to treat people who were HIV-positive. "The big pharma companies would say, 'Screw that, why are we going to waste our money on one of those things? Let the universities figure that out,' " said Hank Klakurka, who ran Merck Generics when it was sold to Mylan in 2007. He also worked at Apotex from 1997 to 2001, reporting to Mr. Kay.
Initiatives like these are "the kinds of thing that Barry saw a need for and would finance year after year after year," Mr. Klakurka adds. "Some of us would look around and say, 'Why are we throwing all that money away?' " Mr. Klakurka was not privy to Apotex's finances, but based on his estimates, Merck would have been much more profitable for a simple reason: "Because we were run like a real business."
And then there was Mr. Sherman's penchant for litigation.
Historically, in order to be first to market, generic companies had to push for exclusive rights to launch a generic version just before a patent expired. That has grown more difficult lately because of changes to patent laws that mean generic drug companies typically all start production on the same day.
Mr. Sherman's court contests could also create financial volatility. Apotex was constantly at risk of losing big cases and paying financial penalties, sometimes to the tune of hundreds of millions of dollars. In one famous example, Sanofi and Bristol-Myers Squibb Co. shared a patent on Plavix, a popular blood-thinner. Mr. Sherman thought he'd found a legal window to flood the U.S. market with a generic version of the drug, but the move backfired and after years of litigation, BristolMyers won a $442-million (U.S.) judgment in 2011.
Mr. Sherman was always proud of his Canadian roots. Apotex manufactures roughly 80 per cent of its drugs at plants north of Toronto. The company also employs 6,200 Canadians, a commitment in the face of incessant industry outsourcing that won Mr. Sherman accolades - he was set to receive the Order of Canada before he died - and helped him build relationships with politicians.
So when the U.S. FDA sent inspectors to two Toronto plants in 2009, Mr. Sherman likely felt confident. But FDA inspectors found a host of problems including "yellow powder," "charred material" and other contaminants in certain drugs, according to a warning letter sent to Apotex. Products from the plants were soon banned from entry into the United States, a damaging blow to a company that depended on growing U.S. sales. Apotex later alleged that the ban cost the company hundreds of millions of dollars in lost sales.
Mr. Sherman went to war, ultimately filing a lawsuit against the FDA under the North American free-trade agreement in 2012. Yet the narrative that developed of Mr. Sherman standing up to protect Canadian manufacturing was flawed. In its filings, Apotex acknowledged that its products "did not fully meet specifications," and the company hired someone from a global rival to oversee its quality control.
To make up for the years of legal battles and lost revenues, Apotex had to do something. In 2013, when cash was tight, Mr. Sherman decided to sell the company's interest in Doc Generici, a profitable Italian generics producer, in a deal alongside its joint venture partners. It was reportedly valued around 300-million (more than $472-million).
It wasn't long before another showdown with the FDA loomed.
Before he'd become CEO in 2014, Mr. Desai had devoted much of his time shepherding Apotex's expansion into India - an initiative designed to fend off lowercost rivals. Yet starting in 2006, the FDA began looking into quality-control issues there, too. And by 2014, the regulator was so concerned that it banned nearly all imports from Apotex's Bangalore plant into the United States.
In a letter, the FDA cited repeated failures to keep proper drugtesting data and alleged Apotex staff had manipulated results. A year later, the regulator raised even more concerns, with inspectors alleging Apotex workers had disregarded adverse test results and conducted unauthorized drug injections.
As the FDA troubles played out, Apotex struggled with a "tech transfer" to India - that is, exporting its Canadian manufacturing prowess abroad. These struggles are common for older companies, yet Apotex's issues were likely rooted in some historical dysfunction, according to Mr. Klakurka. "His [Mr. Sherman's] flaw, I would say, would be that he would put up with technical people and their b.s. for maybe too long, and gave too many people second, and third and fourth chances to get it right - at his expense," he said. "When you have something like India, or China, you've got to have a guy there, sitting on the ground with those people - somebody who you know and trust your life with," he added.
Mr. Sherman trusted Mr. Desai, who led the push into India, but Mr. Desai seemed to lean on local talent. Now, the problems in India are seemingly never-ending.
While the FDA issues were eventually resolved, last December Britain's equivalent to the FDA banned imports from the Indian facility - a ruling that applies to the entire European Union.
"India has been an anchor around Apotex's neck," said a former senior employee.
THE INCREDIBLE SHRINKING COMPANY
After Mr. Desai abruptly left Apotex in January, it fell to Mr. Watson, the new president, to put out all the fires. A Halifax native, he joined the drug maker's sales and marketing team in 1993 after playing a few seasons as an offensive lineman in the Canadian Football League. Save for a brief stint with Shoppers Drug Mart, he has been there ever since. Mr. Watson is a close confidant of Mr. Kay's, and the two men had breakfast every month for years as he rose through the ranks.
The strategy he is now spearheading is multi-faceted. Most notably, although, it emphasizes Apotex's North American roots.
Jeff Watson, president and COO of generic drug company Apotex, is part of the new management team following the death of the company's founder, Barry Sherman.
FRED LUM/THE GLOBE AND MAIL
Apotex employees work at the drug maker's North York, Ont., packaging operations on March 29. Apotex manufactures roughly 80 per cent of its drugs at plants north of Toronto.
FRED LUM /THE GLOBE AND MAIL