It was a busy day for generic drugmaker Mylan Laboratories (NYSE:MYL), which announced four separate news releases today. First came news of a management shakeup in conjunction with its acquisition of Indian generic drugmaker Matrix Laboratories. Mylan followed that up with two more approvals -- one to market a generic version of GlaxoSmithKline's (NYSE:GSK) antiviral herpes treatment Valtrex, and another to market a generic version of Alza's Duragesic pain patch. (Alza is a subsidiary of Johnson & Johnson (NYSE:JNJ).)
But it is the news that a piece of legislation was introduced in the Senate yesterday that might have the biggest effect on Mylan and competitors like Barr Pharmaceuticals (NYSE:BRL), and the future of the generic-drug industry as a whole. This legislation would outlaw the practice of pharmaceutical companies launching authorized generic versions of their branded drugs.
When a generic drugmaker becomes the first to successfully challenge the validity of a branded drug's patents, the FDA gives it a 180-day exclusivity period where it may be the only competitor against its branded counterpart. Gaining this exclusivity period is worth hundreds of millions of dollars on some drugs, and this is one of the main ways that generic drug companies make their profits. Congress passed a law giving generic companies this lucrative 180-day duopoly to encourage them to challenge what can be shaky patents that big-pharma tries to attach to their drugs to extend their patent protection.
The problem has been that pharmaceutical companies have been trying to get around this exclusivity period and squeeze out extra profits for themselves by willingly letting a second generic drug company market an "authorized generic" version of their product when the exclusivity period starts up. This kneecaps the profits of generic drugmakers who take the risk and spend years and millions of dollars fighting the invalid branded-drug patents in court in order to get that exclusivity period.
In fact, when a second generic copy of a drug enters the market, the price of the first generic falls from 94% of the branded drug's price all the way down to 54% of its price on average, and causes generic drugmaker profits to decline. Less profits on a generic drug means a huge disincentive to fight against branded-drug patents in the future. This is what Sens. Schumer, Leahy, Kohl, and Rockefeller want to fix with their bill.
It's a simple rule of economics that the less competition there is, the higher the profits from selling a product could potentially be. Investors interested in any of the generic drugmakers should pay close attention as this piece of legislation moves its way through Congress -- it could have a hugely positive effect on Mylan and the whole generic-drug industry if it eventually becomes law.
Johnson & Johnson and GlaxoSmithKline are Income Investor recommendations. Barr is a Stock Advisor selection. You can take any of our newsletters for a free 30-day trial.
Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy.
