Buy a Company, Get the Plant for Free

Merck (NYSE: MRK  ) is continuing its push further into biologic drugs -- those protein-based therapeutics that are harder to make but potentially more lucrative. Earlier this year, the company bought a pipeline of follow-on biologics (and a manufacturing plant to make them in) from Insmed (Nasdaq: INSM  ) . Now it's back for more with an acquisition of Avecia Biologics.

Merck was already a customer of the contract manufacturer that specializes in making biologics produced in yeast and bacteria, so at least it has some experience with what it's buying.

Assuming Merck didn't overpay -- terms weren't disclosed -- the purchase seems like a good idea. It could have built its own plant, but that would have taken time and money. This way, Merck gets manufacturing capabilities that are up and running, staffed by people who know what they're doing. Not to mention, Avecia is a contract manufacturer, so it has probably become efficient at manufacturing so it can win outsourcing bids.

Merck says it'll "engage in discussions with individual customers relating to their specific ongoing and future biological process development and manufacturing needs after the transaction is closed." I'm not sure if that means it plans to try to retain customers like Dyax (Nasdaq: DYAX  ) or kick them to the curb as soon as possible. Either way, it can use whatever manufacturing capacity is left to develop manufacturing protocols for its pipeline of biologics.

I understand Merck's and Pfizer's (NYSE: PFE  ) push to join more traditional generic-drug makers like Teva Pharmaceutical (Nasdaq: TEVA  ) and Novartis (NYSE: NVS  ) in making follow-on biologics. The U.S. will open its doors to follow-on biologics soon, assuming it's included in the health-reform bill, and that's billions of dollars of potential new business.

The push further into branded biologics has to make you wonder, though. Genentech and Amgen (Nasdaq: AMGN  ) have been selling them for a long time. What the heck took pharma so long to figure out that there's money to be made in biologics?