When Roy McKnight, the 55-year old president of a manufacturer’s representative company, was brought in as chief executive of Mylan Laboratories in 1976, even he had his doubts. He had no previous experience in the drug industry, and he faced a formidable challenge. McKnight now recalls: “We had $1.9 million in accounts payable, with 70% of that more than 150 days old. We owed more than $400,000 in delinquent withholding and FICA taxes. We had 320 production people out on strike, even though we didn’t even have a union! Our inventories were overstated by $2 million, and we had a negative net worth of $900,000.” In short, “the company was facing imminent bankruptcy.” Could it be turned around? “Back in 1976,” says McKnight, “that was an open question.”
Although Milan Puskar, one of the original founders of the company, had resigned in the early 1970’s, frustrated by the direction the company was taking, he continued to believe that the generic pharmaceutical industry had great potential and that Mylan Laboratories had a future. It was he who convinced McKnight to have a try. Together with Frank Beber, a former partner with the accountants Alexander Grant and Company, they took on the task of curing a very sick company. Today, 12 years later, Mylan Laboratories ranks as one of the top manufacturers in the growing generic drug market.
Back in 1976 Mylan Laboratories set itself the goal of becoming a leading company in the manufacture of pharmaceuticals under their chemical names. More practically, before that goal could be reached, its new executive team set about repairing the almost terminally struggling company they had inherited. They acted immediately on what they saw as the causes of the crisis: the company had expanded too fast into too many products, and it was being overwhelmed by high production costs. McKnight took the necessary remedial action: he persuaded the company’s bankers to extend more credit (personally guaranteed by members of the Mylan board); he settled the strike by allowing workers to unionize but simultaneously reduced the workforce by one-third; he encouraged more aggressive marketing campaigns; and he discontinued all products that were unprofitable. One year later, the company was operating in the black.
It has continued to grow because of management’s innovations. Instead of employing an army of salesmen to contact physicians and pharmacists directly, Mylan used just four salesmen to sell commodity generics under their chemical names directly to bulk buyers—drugstore chains, mail-order houses and distributors. Mylan also entered the growing market for branded generics—drugs on which patent protection has expired and the market has accordingly declined, drugs that large pharmaceutical companies generally farm out to others to manufacture. Because consumers are willing to pay more for a brand-name generic, McKnight realized that these products could involve great potential for his company. Today, branded generics account for 40% of Mylan’s sales.
Mylan concentrated too on new product introduction— though, with generic drugs, this is a tricky strategy. Market shares can never really be protected; as drugs come off patent, competing companies are sure to quickly manufacture their own generic versions. Mylan’s experience with Lasix, the best-selling diuretic in the country, provides a good example. On 27 August 1981 the company received approval to manufacture furosemide, the generic equivalent. By the close of business that day the company had recorded $1 million in sales; within three days, they had doubled that number. For a company that then had annual sales of only $31.8 million, such response was extraordinary. Yet within two months there was competition in the marketplace. That scenario is typical in the generic industry. Mylan Laboratories, however, has had remarkable success in weathering competition. By 1982 there were nearly 100 products on the company’s list, and only one other manufacturer of generics came close to posting similar profits.
Much of Mylan’s success, as that of other generic manufacturers, can be traced to a change in consumer attitudes over the last two decades. Consumers has begun to rebel against the high cost of prescription drugs; so, too, have insurance companies and the federal government, eager to limit the rising cost of health care. The generic drug companies, and the discount drug chains, have tried to respond to that challenge. But a potentially large marketplace also breeds a potentially large number of competitors, which can in turn can lead to both price-cutting and diminished profits, and Mylan has had to act with particular cunning to achieve its success. Management has realized that it can expect overwhelming response —as with furosemide or with indomethacin (for which sales reached $1.5 million in the first week after Food and Drug Administration approval)—only in the first few months the generic is on the market. By choosing to prepare generics for drugs with two to three years left on their patents, Mylan has been successful in completing the requisite FDA tests, in setting up its manufacturing facilities, and in producing enough inventory so as to make an immediate entrance in the marketplace as soon as the patent has expired.
Generic products have not been Mylan’s only success. The company has also made notable advances in the development of innovative drugs. In 1984, after spending $5 million on research and five years on clinical tests, the company received FDA approval to market Maxzide, a diuretic hypertensive. Maxzide was in direct competition with SmithKline’s Dyazide, the third best-selling patented drug in the U.S., but Mylan’s product was not a generic version but rather a new formulation of chemicals. McKnight described the FDA approval of the newly developed drug as the “single most important event in Mylan’s history.” Aside from marking the company’s entrance into the field of drug development, Maxzide promised to gain wide market acceptance. The reformulation solved problems of bio-availability as well as offering a convenient once-a-day dosage. Using the Lederle Laboratories sales force to distribute the drug, Mylan predicted that sales of the diuretic would reach $100 million by 1987-88.
Despite such accomplishments, the generic market continues to be the mainstay of Mylan’s business. In September 1985 the company received FDA approval to market diazepam, the generic version of Valium, the phenomenally successful Hoffmann-La Roche tranquilizer. Eager to protect its threatened monopoly, Hoffmann-La Roche sponsored a study that claimed that generic versions of Valium were less effective. Yet Mylan, along with several other companies marketing diazepam, remained confident about the drug’s acceptance in the marketplace.
During the last decade the best selling and most profitable drugs have increasingly come under the threat of generic competition. Further, passage of the Drug Price Competition and Patent Term Restoration Act in 1984 enables generic producers to gain quicker FDA approval by allowing these companies easier access to drugs for which patents had expired. To the chagrin of not only Hoffmann-La Roche but also many other large pharmaceutical companies who feared for their own very successful products, some 21% of Valium’s $310 million market was whittled away by diazepam in the first few months following its introduction.
To protect themselves against the growing threat of generic competition, a number of the large companies have engaged in an energetic and often vituperative campaign to discredit generics. These efforts, though costly, have been mainly ineffective. By the end of 1986 sales of generic drugs had reached $3 billion.
For Mylan Laboratories in particular, 1985-86 was a record-breaking year. Besides having won approval for diazepam, the company received FDA approval to market seven new generics, including Flurazepam-HCL, a generic version of Hoffmann-La Roche’s sleeping pill Dalmane. On Wall Street, Mylan shares sold at 40 times earnings; between 1979 and 1985 Mylan shares had been split six times. In a 1986 Financial World survey, Mylan Laboratories ranked 37th on the magazine’s list of the 70 top growth companies.
Although the share price of generic drug companies increased almost 300% between the years 1983 and 1985, Wall Street analysts began warning in late 1985 that it was unlikely that the generic companies could continue to post such gains; the warnings themselves had the effect of reducing many share prices. The analysts’ main worry was that it would be increasingly unlikely that the generic companies could continue to post such impressive gains when the gains themselves were acting as an incentive to draw more competition into the marketplace. Yet, established generic drug companies have shown remarkable resiliency—none more than Mylan.
Mylan Laboratories will of course face competition from other generic drug companies; the large drug companies will probably provide even greater competition. With their huge expenditures on research and marketing, these companies will continue to have the superior means to develop new products and market them effectively. Yet McKnight and his colleagues are no strangers to solving difficult problems. Modest about his own achievements, McKnight denies that he and his colleagues are “miracle workers.” “We would not have achieved what we did,” he says, “if Mylan Laboratories hadn’t had one foot in the grave.” One is tempted to add that, after bringing the company back from the dead and making it the most successful generic drug maker in America, meeting the competition of even the largest pharmaceutical companies seems only a minor challenge.
Mylan Pharmaceuticals Inc.