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Report On Business Questions swirl about Apotex’s direction as it copes with loss of Barry Sherman

Pill bottles are seen at the Apotex Inc. plant in Toronto in this 2011 file photo.

Norm Betts/Bloomberg

In the wake of Barry Sherman's shocking death, Apotex Inc., the generic pharmaceutical company he founded, is suddenly coping with major questions on two fronts.

The first is about ownership. Canada's largest maker of generic drugs, with $2-billion in annual global revenues and about 6,000 Canadian employees, must find its direction without the man who controlled it and, by all accounts, spent the past 43 years obsessed with ensuring its prosperity. The company has said nothing about its succession plan for him, how its ownership might change, or how the family's shares will be managed.

Apotex has always declined to go public or sell to a larger global drug manufacturer, with Mr. Sherman retaining the role as principal shareholder to make sure he could call the shots without the pressure of quarterly reporting and answering to outside shareholders.

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"At this time there are no plans being contemplated to change the ownership of Apotex," said Jordan Berman, a company spokesman.

Mr. Sherman and his wife, Honey, were found dead in their Toronto home last week. Their deaths have stunned the country's business and philanthropic elite; police have determined they both died from ligature neck compression. A large memorial service is scheduled for Thursday, and police forensic investigators are still unearthing details about their deaths.

Whoever does step up at Apotex to fill the void left behind by Mr. Sherman must confront a real business challenge: The company is making its largest investment ever in the United States, just as that market is roiled by increased competition and pressure to drive down drug prices.

Although Mr. Sherman was proud of Apotex's Canadian roots, the company has spent many years expanding abroad.

Beyond its home borders, its major markets in terms of sales are the United States, Australia and Mexico. Apotex's annual revenue is now approximately $2-billion, and have been for three years, according to the company. In 2016, $1.2-billion of these came from Canada, according to IQVIA, which tracks market share data for the industry. Jeremy Desai, who has been chief executive officer since August, 2014, shared a deep personal connection to Mr. Sherman, according to sources. The United States has become a growth priority, and earlier this year the company embarked on a $184-million (U.S.) expansion in Florida that will house a new research and development centre and a packaging facility.

The investment aligns with moves in the pharmaceutical industry. The United States has long been a tantalizing market because of its large (and aging) population and its status as the world's biggest economy. However, the country could be on the verge of pharmaceutical disruption – and generic manufacturers are at risk of feeling the most severe effects.

Prices for generic drugs have already started to fall 7 to 8 per cent annually, and they are projected to drop even faster, possibly 10 to 12 per cent annually, according to a team of analysts at Credit Suisse who cover the generic drug industry.

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"With more and more new players entering the U.S. generic market, there seems to be no immediate respite and the problem is only worsening," they wrote in a report earlier this year.

"The worst has not yet played out, and returns should decline sharply."

Drug manufacturers are facing difficult challenges on multiple fronts. On the demand side, wholesale buyers continue to consolidate, or team up with each other to gain more power when negotiating prices. Express Scripts has joined the Walgreens consortium for generic buying; drug giant McKesson Corp. has partnered with Wal-Mart; and CVS Caremark teamed up with Cardinal Health for generic sourcing. These large buyers now make up roughly 90 per cent of purchasing in the U.S.

Generic drug supply is also expected to skyrocket in the United States because the Food and Drug Administration has made shortening approval times one of its goals. Frustrated with the country's elevated cost of drugs, the FDA is expected to boost the number of generic drugs it approves annually for sale in the United States in the next two years – putting an emphasis on approvals for new entrants. India is already a generic drug manufacturing powerhouse, but more countries are replicating its prowess, including China and Taiwan.

Apotex is particularly vulnerable in this environment because its strength has historically been in drugs that are administered orally. These drugs are the easiest for new entrants to replicate because making them involves copying chemical compounds. Injectable drugs, meanwhile, often having a living ingredient in them.

Under Mr. Sherman, Apotex also made its name with a first-to-market strategy. The founder would often use lawsuits to find a way to be the first manufacturer to launch a generic version of a drug.

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"The U.S. market so far offered higher returns for the early mover as, despite the same investment (R&D and capital expenditure), early movers get higher market share," the Credit Suisse analysts wrote. "However, now with annual bidding and more consolidated buyers, the last entrant has an equal chance of increasing share by being aggressive in the bidding."

In response, Apotex has already launched a biosimilar division, which tries to copy drugs that have living components. However, there is skepticism across the industry as to whether these complex drugs can be replicated as easily.

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