New Wave of Biosimilar Drugs May Boost Generics ETF

Expensive biologics have weighed on health care consumers. However, as the government tries to contain the soaring costs, a generic drugs-related exchange traded fund could capitalize on the growth of cheaper biosimilars.

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 sales.

When a pharmaceutical company develops a drug, a patent is filed on the new drug, which typically expires 20 years from the date of filing. As patents expire, 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 or so-called biosimilars. Biologics are drugs derived from animal or other biological sources to treat diseases, as opposed to chemically based pharmaceuticals.

IMS Health calculated that global biologic sales jumped from $46 billion in 2002 to $160 billion in 2012, with expected sales in 2017 to top $221 billion, or 20% of total global pharma sales, according to an Indxx research note.

Biologic drugs are currently about 22 times more expensive than traditional drugs on average. By 2018, biologics could account for 50% of U.S. prescription drug expenditures.