Health care investors can now target a growing segment of the pharmaceutical industry through a relatively new generics drug exchange traded fund.
The Market Vectors Generic Drugs ETF (NasdaqGM: GNRX) tries to reflect the performance of the Indxx Global Generics & New Pharma Index, which tracks a number of global drug makers that generate significant revenue stream from generic drug sale. Investors may recognize some global heavy weights among the ETF’s top holdings, including Teva Pharmaceutical Industries (NYSE: TEVA), Actavis (NYSE: AGN), Sun Pharmaceutical Industries (SUNP), Baxalta (NYSE: BXLT) and Mylan Inc. (NasdaqGS: MYL).
“Over the last few years, generic drugs – low-cost copies of branded drugs – have been gaining in volume and market share,” according to Indxx research.
For instance, healthcare giant Johnson & Johnson (NYSE: JNJ) recently revealed drug sales were up 4.2% worldwide last year, Fortune reported. The healthcare company has been relying on drug sales to support growth as its medical devices unit experiences a decline in revenue. Drug sales now account for about 45% of the company’s total revenue and have increased almost 9.6% annually since 2010.
“Due to the growth of the space, generic drug manufacturers are a compelling investment theme for investors,” according to Indxx. “There are also a number of other trends in the industry, from aging populations and higher healthcare spending to mergers and acquisitions that could make it even more attractive.”
Generic drugs help cut down costs for consumers. These drugs are typically priced at a significant 50% to 70% discount to name brand counterparts. Consequently, many health care services have been actively encouraging consumers to purchases these low cost alternatives, especially in an environment of rapidly increasing costs and aging populations.
From 2013 to 2018, generics are expected to account for 52% of global pharmaceutical spending growth, compared to 35% for name brand drugs, according to IMS Health. Meanwhile, sales for generics are expected jump to $442 billion in 2018 from $267 billion in 2013, an annualized growth rate of 10.6%.
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. From 2011 to 2020, drugs with annual sales of $200 billion will be losing their patent protection. Looking ahead, the biologics patent cliff over the next decade could add to a new group of affordable generics.
Max Chen contributed to this article.