Bruce Downey, Generic-Drug Lord

The CEO of Barr Labs is litigating his way to the big time

Bruce L. Downey has always had a knack for making a buck. As a teenager in the town of Athens, Ohio, Downey would set some 80 steel traps along the Hocking River to catch muskrats. Then he would skin them in his family's garage and sell the pelts for about $3 each. And after the river overflowed in Athens in the early 1960s, Downey used his father's boat to ferry stranded college students through the flooded streets for a few days. He netted a couple of hundred dollars from that operation. "I was a hustler," Downey recalls with a laugh.

These days, the 53-year-old Downey is after the big money. As chairman and chief executive of the generic drugmaker Barr Laboratories Inc. (BRL ), the onetime trial lawyer has spent millions to challenge patents on some of the big pharmaceutical companies' most valuable products, racking up a series of impressive wins as well as lucrative--and sometimes controversial--settlements. He's now gearing up to make patented products as well. To big pharmaceutical companies, Downey is a major headache, threatening some of their most important franchises. And while Downey paints himself as a champion of the consumer in his efforts to bring cheaper drugs to market, critics argue his settlements have benefited Barr at the consumer's expense. While other generic drugmakers may use the same strategy, no one has enjoyed Downey's success in recent years. "His record is unsurpassed," says SG Cowen Securities Corp. analyst Ian C. Sanderson.

Downey's most recent victory came after a five-year fight with giant Eli Lilly & Co. (LLY ) to invalidate a critical patent on the $2.6 billion blockbuster antidepressant Prozac. Under current drug laws, that gave Barr the exclusive right to sell a form of fluoxetine, a generic version of Prozac, for six months beginning on Aug. 2. Such exclusivity is meant to encourage companies to bring cheaper drugs to market. While a flurry of other Prozac generics could hit when that six months is up, Barr will get a nice sales boost in the meantime. For the fiscal year ending in June, 2002, fluoxetine sales should top $250 million, according to Jon D. Stephenson, an analyst with Barr investor State Street Research.

NO WHINER. No one could succeed as Downey has without being tenacious, even fierce. Having grown up on a 200-acre farm, he still enjoys a good chase, hunting quail once a year with buddy Charles "Chuck" Conaway, CEO of Kmart Corp. (KM ) As a young lawyer in the 1970s, Downey helped lead some of the Justice Dept.'s cases against certain state testing for teachers, arguing it had a discriminatory effect against African American teachers. When he first arrived at Barr in 1991 as an outside attorney, he had to take on the Food & Drug Administration, which wanted to shut Barr down over what the agency described as serious manufacturing problems, including weak quality-testing procedures. Downey made the unusually aggressive decision to sue the FDA, contending its moves against Barr weren't legal. In the end, Barr largely deferred to the FDA, but Downey did keep the company going. In January, 1993, he was appointed president and chief operating officer. He became chairman and CEO one year later when founder Edwin A. Cohen stepped down. He has since challenged patents on eight products, taking on many of the big drug companies. Downey claims to relish the contests: "You have to either be prepared to do battle with the people who want to do you in, or whine about it. We aren't in the whining category."

Now, Downey is considering a radically new strategy. He wants to push aggressively into the market for branded drugs. With Barr's sales nearing $1 billion annually, Downey figures it will be tough to generate strong growth if he relies entirely on the intensely competitive and often unpredictable business of selling generic drugs.

For several years, Barr has relied heavily on the breast-cancer drug tamoxifen citrate. Thanks to a settlement Downey struck in 1993, the company distributes tamoxifen for AstraZeneca (AZN ) at roughly a 10% discount. An AstraZeneca spokesperson declined to comment on Downey. In the fiscal year ending June, 2001, tamoxifen accounted for 65% of Barr's $509 million in sales and 48% of its $62 million in net income. But generic versions of the drug could hit the market as early as 2002. Analysts think that could easily send the drug's sales down to $200 million--and even as low as $16 million--in fiscal 2003. Downey argues that profits on tamoxifen may hold steady or even improve since Barr will get higher margins from manufacturing and selling the product on its own.

Still, with that uncertainty, Downey will use the payoff from fluoxetine to build a branded business. Among his options: licensing or buying compounds that the Lillys and Mercks of the world may pass up. Without a big sales force, though, Barr may not be able to do much with those drugs. And some on Wall Street warn that Downey's proven expertise in the courtroom doesn't assure him success when it comes to identifying promising compounds, conducting complex clinical trials, and crafting an effective marketing strategy. "It's a new playing field where they haven't demonstrated the ability to compete," says Arnhold & S. Bleichroeder analyst Megan Murphy.

Downey is already at work transforming Barr. In June, even before he won the Prozac case, he struck a $576 million stock deal to buy Duramed Pharmaceuticals, which has a 125-person sales force specializing in women's health. Downey plans to double that number. He hopes to launch a new oral contraceptive in 2003. If approved by the FDA, the pill, Seasonale, will reduce the number of menstrual cycles women have from about 13 a year to just four. That option may appeal to those who suffer from severe PMS or endometriosis. While the drug is unlikely to snag a big chunk of the $2.3 billion market, Downey believes it could give a big boost to Barr. Although Seasonale may go up against widely used birth-control pills from companies such as Johnson & Johnson (JNJ ), Dr. Albert G. Thomas, director of family planning services at Mt. Sinai Medical Center in New York City, considers it a viable alternative. But, he says, "the larger the sales force, the more often a drug will be used."

Not surprisingly, Downey is litigating his way in, too. In March, 2000, he struck a settlement with longtime foe DuPont Pharmaceuticals Co. Barr had sued the company in 1998, alleging that it was illegally disparaging Barr's generic version of DuPont's big-selling blood-thinner, Coumadin. Although DuPont did not admit any wrongdoing, it agreed to give $45 million over four years to help Barr develop three branded products.

RESALE RIGHTS. In fact, Downey's willingness to throw in with his competitors has drawn some unwanted attention. The Justice Dept. has asked for documents related to the tamoxifen settlement. Downey believes the matter is closed. And the Federal Trade Commission has launched a study to determine if drug companies have entered into deals to delay the introduction of cheap generic products. Under a 1997 settlement with Bayer over its antibiotic Cipro, Barr dropped its patent challenge. In return, it got either the right to resell the product or receive payments of nearly $30 million a year. Bayer, which refuses to comment, has chosen to make the payments. In addition, six months before the Cipro patents expire in 2003, Barr will be able to resell the product, most likely at a discount. Consumer groups have filed lawsuits against Barr and others alleging that the tamoxifen and Cipro settlements keep the prices of those drugs artificially high. Naturally, Downey disagrees. He points to unsuccessful patent challenges against those drugs by other companies and adds: "In both cases we'll launch a lower-cost product prior to patent expiration and save consumers money."

Although Downey doesn't want Barr to have to rely on courtroom victories, he's not backing off from patent fights. In fact, he is challenging patents on two of J&J's birth-control products, which J&J insists are valid. "He has people digging into corners where others might not be looking," says James F. Hurst, the partner at Winston & Strawn who led the Prozac fight. Bruce Downey knows how to sniff out money.

By Amy Barrett in Washington

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