Mylan's Biogeneric Play

Today's MylanLaboratories (NYSE: MYL  ) disclosure of plans to buy Indian generic drugmaker Matrix Laboratories appears to follow the same rationale of many major U.S. companies in the age of globalization. But the deal has another dimension that investors should consider when evaluating Mylan's future prospects.

If all goes as planned, Mylan will acquire a 72% stake in Matrix for as much as $736 million, making the acquisition the biggest ever of an Indian pharmaceutical company. In a sense, Mylan is behind the curve as far as acquisitions go. Other generic giants, like Israel's TevaPharmaceutical (Nasdaq: TEVA  ) and Switzerland's Novartis (NYSE: NVS  ) , have already snapped up large generic outfits outside their respective countries.

However, Mylan's move into India seems better-founded, based on the logic of globalization. Teva and Novartis made purchases in the well-established U.S. and European drug industry. But India also has a sizable labor pool skilled in drug manufacturing, thanks to a mature industry that includes giants like Dr. Reddy's Laboratories (NYSE: RDY  ) and Ranbaxy Labs. In addition, India's labor costs are far lower than those in Europe and the U.S.

Even more intriguingly, Mylan will gain Matrix's considerable expertise and experience in producing generic biologic drugs, a capability that Mylan CEO Robert Coury believes will give his company an edge in an expanding biogeneric market.

As I've written before, the U.S. Food and Drug Administration hasn't provided an approval process for generic copies of biologic drugs, but the establishment of such a pathway seems more a question of "when" than "if." With $20.2 billion in global sales, biologics are particularly vulnerable to generic competition; companies that can capitalize quickly on new regulations stand to win big.

Admittedly, even with this acquisition, Mylan will be lagging in the race to cash in on biogenerics. Novartis has gained FDA approval for a human growth hormone, which, while not officially a biogeneric, stands a good shot at stealing branded sales. Furthermore, Novartis has five more such "biosimilar" drugs in development. Still, if Mylan can capitalize on Matrix's low costs and biogeneric expertise, it may yet be a contender.

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Fool contributor Brian Gorman does not own shares in any the companies mentioned.


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