A report in the Pittsburgh Post-Gazette yesterday about Mylan's (NASDAQ:MYL) quality control issues makes the company look bad. Really bad! But it's not just Mylan that'll be hurt by the article.
Employees at the generic-drug maker reportedly overrode and deleted automated warnings about potential production problems. The warnings are supposed to be investigated by the quality control department, but low-level workers were able to get around them and resume work. The company has already investigated the departures from standard protocol and claims that the deviations didn't result in any unsafe medication.
Mylan traded down as much as 16% today on the news. That could be an overreaction, because it isn't clear whether any Food and Drug Administration action will come of this. Regardless, I wouldn't recommend Mylan as a bad-news buy at this point. Last month, the agency sent U.S. marshals to seize drug products manufactured by generic drugmaker Caraco Pharmaceutical Laboratories (NYSE:CPD) after repeated failures to comply with good manufacturing practice requirements. The FDA doesn't mess around with manufacturing issues.
While the report makes Mylan look really bad, when combined with Caraco's issues, it could hurt the entire industry.
The problem is that consumers are brand-insensitive to generic drugs. Sure, if you look at the pill bottle, you can figure out who makes the drug, but the pharmacist rarely, if ever, asks you if you'd like the generic of Merck's (NYSE:MRK) Zocor made by Novartis (NYSE:NVS) or the one from Dr. Reddy's Laboratories (NYSE:RDY). The customer gets whatever generic drug the drugstore bought.
If customers begin to mistrust generic drugs from Mylan or whoever -- fearing that the companies are putting profits above safety -- all generic-drug companies, from giant Teva Pharmaceuticals (NASDAQ:TEVA) to small Watson Pharmaceuticals (NYSE:WPI), will be hurt.
The industry better hope that customers don't deviate from their own standard operating procedure of picking generics if they're available.
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