Ted Karkus (CEO of ProPhase Labs) on Transitioning from Wall Street to Pharma and Becoming a CEO
Ted Karkus, entrepreneur and CEO of ProPhase Labs. restructured the entire company, turned around and sold the Cold-EEZE Cold Remedy brand for $50 million. He previously financed and advised ID Biomedical, a biotech company, when it was near bankruptcy. The company was eventually sold for more than $1.4 billion. He graduated Tufts University with a BS in psychology and Magna Cum Laude Honors in 1981 and graduated Columbia University School of Business with an MBA in finance and Beta Gamma Sigma Honors in 1984. He started his career on Wall Street working for a variety of investment banks prior to a financial consulting career which led to gaining control of ProPhase Labs.
Business Today (Kimberley Tran): I noticed that you started off your career on Wall Street. What spurred you to transition to health care, namely pharma?
Ted Karkus: Everybody is wired a certain way, and everybody has natural inclinations in terms of what they’re comfortable doing and the type of work they like to do. Back when I was getting my MBA at Columbia Business School, I was more interested in the stock market than anything else. I’ve always had a passion for investing in companies, and I’ve always found that in order to get an edge in the stock market, I would invest in small-cap development stage companies, which are under-followed.
One of those companies was actually ProPhase Labs. I wasn’t happy with the direction of management in 2009. I was a large investor, and I launched a proxy contest. All public companies have a shareholders meeting once a year, so I nominated a board directors to replace the existing board of directors. I ended up suffering through two federal lawsuits, and a hotly contested election. My Board of Directors won by an extremely narrow margin by less than 1% of the shares outstanding, and they hired me to be the CEO. Now, initially, I thought I was just going to liquidate the company. Instead, after winning control, I found out that the late stage study on the lead product failed, so I had to write off the entire pharmaceutical division. The only business left in the company was a brand called Cold-EEZE Cold Remedy, which at the time, had declining sales for four or five years. The Company was potentially going out of business.
So instead of liquidating the Company, I had to learn how to be a full-time CEO: which included how to manage people, how to fire and hire people, and how to assess employees while learning the consumer products industry. I fired virtually everybody in the company and restructured the whole company and the Cold-EEZE cold remedy brand. I turned it around, regrew the brand, developed the marketing plan from scratch, and sold the Cold-EEZE brand to Mylan in 2017 for $50 million.
I am now taking the company in new directions. I did not sell the company, I only sold the brand. We still do the manufacturing for Cold-EEZE, and we also manufacture lozenges for other companies. I am also developing a line of dietary supplements, for which we’re now starting to gain distribution in retail stores, the same retail stores that Cold-EEZE is sold in.
BT: Given how you have now this tremendous past experience with restructuring and turning businesses that you have invested in around, what were some common overlooked errors that you noticed in these businesses? How would you suggest for other business owners to avoid these mistakes?
TK: With all of the companies I’ve invested in, I’ve found that most small-cap, development space companies make the same mistake. There is a founder who develops an exciting new product, some kind of breakthrough that's different, unique. It's usually a very bright person. Very bright people who develop these products or services tend to believe that the product is everything. Most entrepreneurs don't understand that there's so much more to a company than the product. I would rather invest in a company with a great management than invest in a company with a great product.
Just because founders and inventors understand how to invent a product or develop a service that’s special, doesn't mean that they understand anything about other important aspects of the company. This includes raising capital, the capital structure of the company, managing employees, motivating employees, and working with other companies to sell your product or service. All of these things are critically important to the success of a company.
The best thing as an entrepreneur in a development-stage company is to find partners who specialize in raising capital, because you can't do everything yourself. You have to bring in people with expertise in these other areas, the same way you have expertise in developing a product or service or have a vision or you’re a visionary. You need somebody with the same level of expertise in capital raising, capital structure, dealing with shareholders, managing employees, etc.
BT: Moving on to ProPhase, what I found interesting was how ProPhase is involved in every step of the production process, from R&D up to sales. How do you balance the risk that comes with investing money into R&D with the rate of return from sales?
TK: As I mentioned before, in most start-up companies, the biggest management mistake is a lack of proper capital funding. They don’t have the capital required to develop a product and see it all the way through. In addition to that, you have to figure out how you're going to sell your product, how you're going to reach your consumers. You should ask yourself when you're developing or formulating a product, what's unique about your product? If there's nothing unique about it, then why is somebody going to buy your product versus anybody else’s?
In our case, in any product that we develop, we do clinical studies to be able to substantiate claims that we can make on the packaging. We find that clinical site claims, like being able to say clinically proven or clinically shown, is a huge factor in convincing consumers to check out your product. You also have to look into formulating, developing the product, and then the cost of manufacturing it. There's a lot that goes into creating the packaging, and creating packaging that consumers find attractive.
I'm a big believer in testing and doing consumer surveys. I do online consumer surveys pretty inexpensively to optimize packaging and to figure out what consumers want. I’ll then do consumer surveys on the claims to see what claims are most attractive to the consumer, and I’ll then look to see what products are being offered that we can compete with. I want to make sure that the market for the product we want to develop is relatively large, and hopefully one that doesn't have too much competition.
Before coming to the decision to develop the product, you have to put together a realistic budget. When you add together the costs to manufacture the product and the costs for the packaging, what are you going to be able to sell the product for? What's the retailer’s markup going to be? What are the fees they’re going to want? What is shipping and handling going to be? You have to walk through all of these numbers and then see whether you can create a product that 1) consumers want and 2) sell at a price where they’re interested in it, but where you can still manufacture efficiently enough to make a profit.
BT: The pharmaceutical industry is often known for being dominated by monopolies. How do you feel that ProPhase is able to distinguish itself?
TK: The most important thing is to develop products with a point of difference. In our case, with dietary supplements, what makes us different are the clinical studies that we conduct. First of all, unlike a lot of the competition, we source the world for the best, highest quality ingredients. Number two, we do clinical studies to prove that our products work and do what we say they’re going to do. To me, that is the biggest difference in a highly competitive dietary supplement world: to have quality ingredients and products that actually work, and to do clinical studies to prove that your products work.
BT: Moving on to your role as CEO, do you have any leadership advice--the type of advice that most people would not know about, until they've been in a leadership position like yours?
TK: One of the most important things I recommend, when you’re starting a company, is to put your ego in check and not take your employees for granted, because your employees are the lifeblood of your company. You have to treat people with respect, and treat others the same way they would treat you. The fact that you're a CEO does not give you the right to boss people around. If you don't have good people skills, you shouldn't be managing people. You should actually look to find management consultants to help guide you, particularly in the early years, because everybody has blind spots. If you don’t know how to work with other people, you're not going to get the most out of them, and your company's not going to be nearly as successful as it would be otherwise.
The most important thing is to be open to other people and other ideas. You get to make the final decisions as the CEO. But what’s firstly important--I listen to everyone on my team, everybody has intelligent thoughts and ideas that are worth listening to. Any decision I make, I first discuss it with my team, and I make sure we're all on board. If we're not on board, I want to fully flesh out where our differences are, to see if I'm missing something or see if they're missing something, and then come to a logical conclusion.
BT: What are some of the most rewarding and memorable parts of acting as CEO of ProPhase? In terms of behind the scenes, what sort of interactions do you have with the employees on your team? What are some of those most memorable parts?
TK: What I’m most proud of is the corporate culture. The corporate culture that I believe I created is a culture of enthusiasm, where everybody's working towards the greater good of the company, feels excited, and feels good about coming to work. People leave their bad attitudes at home. I really only want to work with people who are positive and who want to do well. On one hand, it’s a relaxed atmosphere--we crack jokes, we have fun. At the same time, everybody knows that you have to get the business done. I'm very serious about business, but I do it while recognizing that employees are human beings.
Basically, everybody in our company is doing something important, as far as I'm concerned. I get excited and proud of any accomplishment by anybody. If they’re doing good work, and doing so positively, I give them more responsibility.
BT: If you could give advice to an undergraduate student reading our magazine, what would it be?
TK: I would just suggest to follow your passion. Everybody, as I mentioned early on, is wired differently. It's one of the first things I learned when it comes to hiring employees. I’ll do an assessment of every employee before I even interview them, because I want to see how they're wired, what their natural inclinations are. I think that it's really important that you find a job that aligns with your wiring.
If you're looking for a job when you're graduating, look to do something that aligns with what your natural inclinations are. For example, an introverted person should not be in sales. If you are an outgoing, extroverted person, you should do something in sales or do something that involves people. You shouldn’t sit behind a desk, in front of a computer. If, on the other hand, you're an introverted person, and you like calculating numbers or you like working on a computer, then you should find a job at a desk working on a computer. It sounds obvious, but you'd be surprised at how many people look for jobs either in the wrong industry or do the wrong thing, just because their parents want them to do something, or they think, for status reasons, they want to do something. Find a job that fits with your natural abilities and your natural inclinations. And if you are fortunate enough to find a job that fits with your natural abilities, then guess what? You will work harder, be more successful and will have significantly more job satisfaction!