By ANDREW WILLIS
Saturday, December 15, 2018
Jonathon Sherman's first stint at Apotex Inc., his father's generic drug company, lasted just seven months.
Fresh out of engineering school at Columbia University, Barry and Honey Sherman's only son took on a project installing new technology for Apotex's pill packaging lines, then quit to do a 250-kilometre endurance race across the Gobi desert with one of his three sisters.
The 35-year-old's second tour of duty at Apotex was born out of unimaginable tragedy and carries far larger expectations, but is helping strengthen the company financially in the face of widespread industry disruption.
It has been a year since his parents were found murdered in their Toronto home. No arrests have been made and the family is offering a $10-million reward to anyone who can help solve the crime. Jonathon Sherman joined Apotex's four-person board early this year and has emerged as a key decision maker in a restructuring of one the world's largest generic drug makers. The family owns approximately 90 per cent of Apotex through a trust controlled by Jonathon and sisters Lauren, Alexandra and Kaelen, while the remainder is held by employees.
None of the sisters have worked at Apotex.
Along with Jonathon Sherman, brother-in-law Brad Krawczyk and 77-year-old chief executive Jack Kay joined the board last winter. Mr. Kay came out of retirement after the killings. In his new role, Jonathon Sherman has signed off on decisions that fly in the face of his father's strategy.
"Jonathon has stepped forward as a mature businessman," said lawyer Shashank Upadhye, who sat in the office next to Barry Sherman's for five years as Apotex's general counsel and is now a partner in a Chicago law firm that advises pharmaceutical companies. He said part of that process was Jonathon recognizing he can honour his father by helping steer the company while realizing no one can replicate his father's vision and work ethic. Mr. Upadhye said: "Barry, first and foremost, was a brilliant and proud Canadian, who cared deeply for his people and his country."
The founder's name is still spoken with reverence within Apotex. The entire 11,000-employee company shut down on Friday to honour Barry and Honey Sherman's memory.
Yet changes overseen by Jonathon - such as culling the portfolio of drugs, resolving lawsuits and selling underperforming foreign operations - have boosted profit margins, according to insiders and advisers who are privy to the private company's financial results, but not permitted to speak publicly. Apotex executives and a lawyer for Jonathon Sherman and the family declined requests for formal interviews.
Outside and inside Apotex, there is a widespread expectation that the family and executive team are polishing up the business as the prelude to a sale.
In the not-too-distant future, rival drug makers, pension funds and private equity firms are expected to take part in an auction that would value Apotex in the billions, according to bankers and legal advisers familiar with the company.
If the company does change hands, one challenge facing Jonathon Sherman and his sisters is honouring their father's patriotism by finding an owner willing to preserve approximately 2,000 domestic manufacturing jobs, mostly in Ontario. Larger rivals are boosting profit margins by operating out of lower-cost regions such as India. In a recent media interview, Mr. Kay said prior to Barry Sherman's death, the two executives recognized they would eventually sell Apotex and considered taking less money to guarantee manufacturing remained in Canada. But Mr. Kay told Bloomberg Businessweek magazine: "You can't rule from the grave."
Apotex faces disruptive forces.
In the United States, a key market for Apotex, generic drug prices declined at a 7-per-cent annual clip in recent years, as institutional drug purchasers closed ranks and turned the screws on suppliers. Credit Suisse projects the trend will gather speed, with generic drug prices potentially falling by up to 12 per cent annually. Another study, from PwC, found pharmaceutical companies accustomed to simply selling directly to doctors will need to change their entire marketing strategy, and "the healthcare system will focus increasingly on paying for the value rather than the volume of medical care; in other words, it will be a more consumer-facing industry."
The pharmaceutical industry is increasingly about scale, with takeovers reshaping the landscape. While Apotex is Canada's largest generic drug firm, it's a relative minnow in the global market, with sales of $2.7-billion last year, compared with US$22billion at industry leader Teva Pharmaceutical Industries Ltd.
Industry surveys rank Apotex as the No. 11 player in the key U.S.
market and No. 15 globally.
In the face of increasing competition, dramatic changes played out behind the scenes at Apotex over the past year. It began less than a month after the founder's funeral, with the resignation of CEO Jeremy Desai, who had been accused of industrial espionage by rival Teva. He was replaced by Mr. Kay, while veteran sales executive Jeff Watson was named president and the new four-person board was formed.
Mr. Watson is aggressively pruning Apotex's portfolio of drugs, a project that began in the summer of 2017 when Barry Sherman was alive, then gathered speed last winter. The founder rarely abandoned a product or sold a patent. Mr. Watson has shut down or sold many of the company's least profitable lines, although Apotex honours a policy of continuing to manufacture any drug where it is the sole producer. Apotex churns out 25 billion drug doses annually, and currently markets more than 300 products. Executives with rival firms say approximately 100 Apotex drugs were discontinued or put up for sale in the past year.
Barry Sherman was famously fond of litigation, part of his personal obsession with getting cheaper generic drugs to those who needed them as quickly as possible. That approach is history, according to sources in the legal community. A number of long-standing Apotex lawsuits were quietly settled in the past year. Apotex's lawyers are no longer rushing to court to fight over every new drug. The approach is dramatically cutting legal bills that annually ran to $40million or more. Resolving longstanding claims that can run to hundreds of millions of dollars also eliminates risks that would undermine the company's value in a potential sale.
Another element of Barry Sherman's vision was to provide generic drugs to the entire world, an admirable goal, but not always profitable. In the past year, Apotex scaled back back operations outside North America, while increasing spending on projects such as a $184-million factory in Florida. In May, the company announced plans to merge its businesses in Australia and New Zealand with those of its biggest rival, to create a market leader in the region. In July, the company said it would sell operations in five European countries to a pharmaceutical company based in India for $112million. At the time, Mr. Watson said exiting Europe "is a positive move for our organization and enables us to further accelerate our efforts to drive additional growth in the Americas."
Early in his career, Jonathon Sherman honed business skills by making tough calls on his father's unsuccessful investments.
To the amazement of those who knew him, Barry Sherman backed a series of money-losing ventures from energy drink maker-cum-movie star Frank D'Angelo. One misadventure translated into a $100-million-plus haircut on craft beer maker Steelback Brewery. Jonathon Sherman took over the business from Mr. D'Angelo in 2008 after it filed for creditor protection and attempted a turnaround backed by beer industry veterans. After two years of hard slogging, it became clear there was no public thirst for Steelback, and he shut down the 40-employee brewery.
Tough decisions are coming on the family's stake in Apotex, and there's every indication the Shermans' four children value their mother's tireless philanthropy over their father's passion for pills. In a searing eulogy last December, Jonathon Sherman said: "Our family legacy, like so many others, emerged like a phoenix from the ashes of the European Holocaust, shattered and broken, only to rise and rebuild and to thrive ... My sisters and I pledge to rise again and to continue thriving and to continue building our parents' legacy of loving life, caring for others."
The same philanthropic theme dominated a short press release the Sherman family published on Thursday to mark the anniversary of their parents' passing. The note didn't mention Apotex, but did say: "We also wish to re-affirm our family's continued pledge to the many humanitarian causes to which our parents were deeply committed." Jonathon Sherman and his sisters can fund a charitable legacy if they cash in on their father's life work.
Apotex remains committed to its Canadian operations and staff, such as those pictured here at its suburban Toronto packaging plant, but the company is streamlining its product lines. FRED LUM/THE GLOBE AND MAIL