Breakout new drugs usually receive all the attention in the pharmaceuticals space, but generic drugs make up the bulk of the industry. Now, investors can target the rising growth in the generics space with a new sector-specific exchange traded fund.
Van Eck Global’s Market Vectors Generic Drugs ETF (NasdaqGM: GNRX) began trading Wednesday, according to a press release.
“With rising health care costs, drug manufacturing innovation, and public support for less expensive options to brand name drugs, this is a compelling ETF,” Edward Lopez, Marketing Director with Van Eck, said in the press release. “Our goal with any ETF is to help investors access opportunities presented by evolving global markets. GNRX allows investment in a major trend that has the potential to redefine the pharmaceutical industry.”
Generic drugs make up 88% of the drugs dispensed in the U.S., according to the Generic Pharmaceutical Association. In overseas markets, generics account for 55% of prescriptions in the EU and 47% in Japan.
“That is a large number and helps explain the rapid growth of manufacturers over the past several years,” James Duffy, Product Manager with Van Eck, said in the press release.
When a company first develops a drug, a patent is filed on the new drug, which typically expires 20 years from the date of filing. As patents expire on various brand name drugs, generic drug providers can step in to the market at a significant discount. Looking ahead, the biologics patent cliff over the next decade could add to a new group of affordable generics.
GNRX, which follows the Global Generics & New Pharma Index, will find a number of global drug makers that generate significant revenue stream from generic drug sales. For instance, the ETF’s top holdings include Teva Pharmaceutical Industries (NYSE: TEVA) 8.6%, Actavis (NYSE: AGN) 8.5%, Sun Pharmaceutical Industries (SUNP) 5.8%, Baxalta (NYSE: BXLT) 5.5% and Mylan Inc. (NasdaqGS: MYL) 5.0%.
Generic drugs, which are typically cheaper than name-brand products, have also seen prices increase, with some 22% of top-selling generic prices rising more than inflation, reports John Russell for Chicago Tribune. Nevertheless, the Generic Pharmaceutical Association argues that generics still sell for a fraction of the top brands, which has saved Americans $1.68 trillion over the past decade.
“It’s hard to imagine another sector that can claim nearly 90 percent of a market while delivering it at nearly a quarter of the total cost,” Chip Davis, the association’s president and CEO, said.
Despite the rising prices, the generic drug industry still enjoys stronger fundamentals. Specifically, spending on generics is expected to rise from 40% in 2013 to 46% in 2018.
“With much of that expected growth coming from emerging markets, we believe having global exposure is essential,” Duffy added.
In the developed markets, population growth and an aging demographic are expected to fuel growth. Meanwhile, improved access to health care and a rising middle class could drive growth in the emerging markets.
GNRX includes a heavy 40.9% tilt toward the U.S., along with 19.6% India, 8.6% Israel, 6.4% South Korea, 5.9% Japan, 5.1% China, 3.4% Belgium, 1.7% Switzerland, 1.6% South Africa, 1.3% Jordan and 1.0% Indonesia.
Max Chen contributed to this article.