ETF Trends
ETF Trends

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.

Consequently, as a way to mitigate the costs, regulators have laid the groundwork for generic biologics – health care savings from biosimilars could range from $25 billion to $250 billion over the 2014 to 2024 period. Biosimilars is also gaining traction as major U.S. presidential candidates have publicly called for controlling skyrocketing drug prices.

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The increased focus on the space could help biosimilars grow from $2.4 billion in 2014 to $26 billion by 2020 on the expiration of patent protection for blockbuster biologic drugs. Evaluate Pharma calculated that biologics with aggregate U.S. sales of $79 billion will lose their patent protection between 2013 and 2018.

GNRX’s underlying index also includes about a 15% tilt toward biosimilars. Moreover, generic drug companies included in the underlying index are looking into biosimilars as their next growth opportunity.

Market Vectors Generic Drugs ETF

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.