In late 1985, LyphoMed Inc., a fast-growing pharmaceutical manufacturer, was preparing to enter the fight against cancer. Its chosen weapon, however, was giving the company unexpected problems.
The suburban Chicago firm was readying a generic version of methotrexate, a drug to combat cancer tumors. It would be the small company`s first entry into the lucrative but highly competitive anticancer field.
Though methotrexate is one of the oldest and most commonly used anticancer drugs, it remains difficult to make. LyphoMed was able to obtain the right chemical stability of methotrexate in a liquid form before freeze-drying it into a powder. However, when test vials of the first batch of powdered methotrexate were mixed with a liquid again, the chemical stability problem-a high pH-reappeared.
The result, say sources familiar with the incident: At least 5,000 vials- perhaps as many as 10,000 vials-of the anticancer drug failed government quality requirements when the powder was mixed with a liquid for injection into patients.
”A pH above what is accepted by the government in methotrexate could lead to potential instability problems in the drug`s active ingredient,” said Jim Koeller, past chairman of the oncology group of the American Society of Hospital Pharmacists.
Though Koeller said the drug should be ”okay in normal practice,” he notes, ”You have 100,000 people out there; you don`t know how they`re using the drug.
”You could be using it on a cancer patient when it`s not potent,” said Koeller, associate clinical professor at the University of Texas Health Science Center, San Antonio.
Top company managers and John N. Kapoor, LyphoMed`s chairman and chief executive officer, briefly discussed the chemical stability problem of methotrexate-though not the possible medical consequences-at a staff meeting. But Kapoor cut off discussion about delaying methotrexate`s introduction, say several managers who talked with Kapoor at the meeting or in conversations afterwards.
”He said, `The CEO can overrule the quality-control director,`
” remembers one executive who was present at the meeting.
Later, the vials of the anticancer drug were shipped from LyphoMed to customers across the country.
A LyphoMed spokeswoman declined a request for an interview on the topic, and Kapoor declined to respond to a letter detailing the methotrexate incident.
However, Gary P. Schmidt, LyphoMed`s senior corporate attorney, stated in a response that neither the company nor any individual at the company ”is guilty of intentionally producing and distributing products that could endanger life or health.”
The Tribune`s recent articles on the company, wrote Schmidt, contain
”factual errors and inflammatory charges.”
Interviews with more than 35 current and former LyphoMed employees-from production workers to senior managers-raise a broader range of questions about the maker of vitamins, nutrients and injectable drugs for patients with cancer, severe infections, heart disease and AIDS.
The interviews paint a picture of a company whose success was so dramatic and so appealing-an immigrant entrepreneur turns around a failing company, a small firm flourishes by outmaneuvering big competitors-that early signs of trouble drew scant scrutiny from LyphoMed`s board of directors, security analysts or federal regulators.
”Methotrexate was a symptom of the overall problem (LyphoMed) had with all that growth,” said another former senior executive.
”(LyphoMed) was going to grow, no matter what,” agreed a third former executive familiar with the methotrexate situation.
A Food and Drug Administration inspection report released in March lends some support for that view. The report summarized a three-month inspection of the company`s main facility in Melrose Park. After reviewing records dating back more than two years, the FDA harshly criticized LyphoMed`s quality-control procedures.
”Products that failed to meet established official or in-house specifications were released for distribution,” the report concluded.
In one case, ”without written justification, management invalidated”
several tests showing sterility problems with furosemide, a diuretic that can be used for heart or kidney disease, the report said.
In a response to the FDA, LyphoMed said it followed proper procedures on furosemide and discovered that the sterility problem was due to an inadvertent contamination of a test vial by a technician.
The report doesn`t appear to deal with LyphoMed`s first batch of methotrexate, though the time period when drugs mentioned in the report were manufactured is not always clear.
LyphoMed`s quality-control system has also come under challenge on a different front. Richard Johnson, a former quality-control manager, alleged in a lawsuit that he was ordered in late 1987 by LyphoMed`s director of quality control to release several lots of contaminated drugs. The company denies the charge and says Johnson was fired for ”performance reasons.”
Although LyphoMed`s growth may have brought problems, it clearly produced benefits, too. Among them was favorable national attention in the business press and an enthusiastic following on Wall Street.
Annual sales soared from $1 million in 1978, the year Kapoor joined the company as its chief, to almost $173 million in 1987. That translated into an eye-catching 55 percent annual growth rate. Losses of $20,000 a month in 1978 were transformed into a yearly profit of $21 million by 1987.
LyphoMed`s 1987 profit margin from its operations, meanwhile, reached 1 1/2 to 2 times the generic drug industry`s average, according to Michael Harshbarger, an analyst with Hayes & Griffith.
Directing that turnaround was Kapoor, an Indian immigrant who entered the pharmaceutical business in the early 1970s after earning a doctorate in medicinal chemistry at the State University of New York in Buffalo.
Kapoor made it convenient and cost-effective for hospitals to buy certain critical nutrients and drugs that didn`t offer enough sales to attract larger companies. He won an exclusive license from the federal government to make pentamidine, a drug to treat pneumonia associated with AIDS, when acquired immune deficiency syndrome was still an obscure disease.
With loans from investors and a $24,000 second mortgage on his Evanston home, Kapoor bought LyphoMed from Stone Container Corp. in 1981. After LyphoMed became a publicly-held corporation, he moved to a lakefront Lake Forest estate with the profits generated from his personal stock holdings.
Both Kapoor`s supporters and detractors characterize the 44-year-old LyphoMed chief as brilliant. He is also, they say, a tough, hard-driving competitor who retains a tight grip on the company he has created and in which he still owns a 14 percent stake.
”It`s his company, and he wants to know everything, sometimes to what you`d think was an insignificant detail,” says Diane Komos, who left LyphoMed as director of regulatory affairs last fall to start her own company in California.
Kapoor`s workday often starts well before dawn, even on weekends. Other employees are expected to match that pace, and most do: Tales of managers working double or triple-shifts to keep a production line going or processing customer orders until the wee hours of a Sunday morning are not uncommon.
But the pace can take a toll. ”There`s a high burnout rate. People are being pushed beyond their limits,” says a veteran employee with quality-control responsibilities.
LyphoMed has gone through five heads of operations in four years; all but one resigned under pressure or were fired. Meanwhile, an executive hired from Baxter Travenol Laboratories Inc. early last year with promises of becoming Kapoor`s heir apparent resigned within eight months.
Though LyphoMed`s board helped hire the executive, no board members ever asked him why he quit, say sources familiar with the episode.
”I`ve known John for 15 years, maybe 20,” says Chris Wright, a former director of materials management at LyphoMed who now runs his own company in the western suburbs. ”He`s very, very bright. (But) John has a habit of blaming people rather than solving the problems.”
In addition to the Johnson lawsuit, LyphoMed also faces wrongful discharge suits from the former head of its Canadian operations and from a former director of corporate development. The latter ex-exec charges that he was ordered to negotiate a sales contract with LyphoMed`s largest customer that violated anti-trust laws. The company says both suits are without merit. The Johnson lawsuit was mentioned in a Tribune article noting that LyphoMed recalled drugs four times and received three ”regulatory letters”
citing ”serious violations of the Food, Drug and Cosmetic Act” between the time Kapoor became LyphoMed`s chief in June, 1978, and November, 1987.
This past November, the company received another regulatory letter and had its new-drug applications put on hold by the FDA pending correction of quality problems.
In a letter to The Tribune, LyphoMed attorney Schmidt said that the article unfairly implied that the company ”had a long record of regulatory and quality problems. A number of points were strung together to indicate a 10-year problem. The fact is, LyphoMed`s record during the time period indicated was very good.”
A LyphoMed spokeswoman said the company is hoping for speedy settlement of the issues raised in the March FDA report. A settlement would open the way for reapproval of new drug applications.
The FDA report cited 44 violations of ”good manufacturing practices.”
It concluded that the Rosemont-based company shipped products that failed some sterility tests; changed the manufacturing process, or ”master formula,” for several drugs without knowing the effect of the changes; distributed drugs without proper FDA approval; had discrepancies and alterations in laboratory, production and quality records; and failed to establish quality standards in some areas.
The FDA also indicated that information showing problems with methotrexate quality often was not properly recorded. As a result, the information was not easily available to company officials responsible for deciding whether the drug should be released.
The methotrexate batches described in the FDA report were made in 1986 and 1987. They apparently were not sent out to customers. There is no record of a company investigation into the quality problems with these batches, the FDA said.
LyphoMed said it has taken action already to correct 75 percent of the problems and is working on the other 25 percent. However, the FDA is nonetheless laying plans for further legal action against the company, possibly including seizure of some drugs or an injunction, say agency sources. The March FDA report offers no theory as to why the problems occurred. But numerous plant-level and headquarters managers interviewed for this article said they felt a strong tension between maintaining quality standards and meeting LyphoMed`s ambitious financial projections.
Wonders one quality-control veteran still at LyphoMed, ”Are we a quality company or are we a quantity company?”
For example, a major part of company profits depended for years on LyphoMed`s West Grand Avenue plant, a small, two-story building in one of Chicago`s toughest neighborhoods. Many of those who worked there say the plant was antiquated. Among other things, its systems to cool and filter air-one way to stop the possible spread of bacteria to uncovered vials of drugs-often seemed to be fighting a losing battle.
”I was surprised (the plant) was still in existence,” says J. Fred Pruden, who first toured the plant in ealy 1986 as LyphoMed`s vice president of operations.
He added, ”The growth of the company was such we couldn`t shut that facility down,” he says.
The FDA sympathized with LyphoMed`s need to keep its production lines going.
In a Sept. 4, 1985, report on his inspection of the West Grand Avenue plant, FDA investigator John Bruederle notes that the facility ”was supposed to have been phased out” when the Melrose Park plant began operations in June, 1984.
However, ”New products and increased sales have created a need for this plant, and it will remain in operation,” the memo continues.
In an interview in January, LyphoMed officials said they constantly renovated the West Grand Avenue plant as needed. They closed the plant permanently in November, 1987, following an FDA inspection that uncovered a long list of quality control problems that the company decided were too expensive to fix. The company also recalled six lots of anticancer drugs the FDA identified in its report on the plant as having possible sterility problems.
The seriousness of recent FDA allegations regarding quality at LyphoMed appears to be spawning a more critical view of the company.
LyphoMed`s board has ordered the hiring of an outside quality auditor who will report to the board, with Kapoor absenting himself, say sources familiar with the directive.
Meanwhile, the company has said there are three shareholder lawsuits alleging that LyphoMed failed to disclose its regulatory difficulties in a timely manner.
Kapoor himself has publicly promised changes in personnel, procedures and attitudes. In a March 17 letter to Raymond Mlecko, Chicago district director of the FDA, Kapoor wrote that the reinspection of the Melrose Park plant was
”a mutually beneficial experience.”
At the same time, Kapoor announced a 50 percent cutback in production at the plant until quality problems can be solved. The cutback will cost the jobs of 73 workers, about a quarter of the work force there. Production will be transferred to plants in New York and Florida.
Perhaps most importantly, LyphoMed is feeling pressure from some nervous customers. For instance, American Medical International Inc. decided not to renew a a buying contract for its 85 U.S. hospitals, as did Premier Hospitals Alliance Inc., which buys for 49 hospitals, according to officials with the two companies. The officials cited worries about quality as the reason for their decision.
LyphoMed officials have acknowledged that its dispute with the FDA will have an ”adverse financial impact” on profits for the first quarter of 1988. For the first time, LyphoMed will probably earn less money during one quarter than during the period a year earlier.
The company`s stock, which has traded as high as $31 a share during the last 12 months, is currently trading at just under $10 a share and has dropped as low as $9.
In its 1987 annual report, the company still talks of being a ”preferred supplier to all U.S. hospital buying groups.” Privately, however, insiders and former executives talk of a fall from grace that will take many months to overcome. It is a change in fate that saddens even some Kapoor detractors.
Says a former exec made wealthy by his LyphoMed salary and stock options: ”That place was my dream, too.”
