The VanEck Vectors Generic Drugs ETF (NasdaqGM: GNRX) traded slightly higher Tuesday after the U.S. Supreme Court issued what some industry observers are calling a mixed ruling on expediting the availability of lower-cost equivalents to high-priced biotechnology drugs.
“The justices said patent holders can’t use federal law to enforce a requirement that companies seeking to sell ‘biosimilars’ provide information about their product. The unanimous court, however, said patent holders might be able to use state law to accomplish the same goal,” reports Greg Stohr for Bloomberg.
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.
“The court’s decision was also applauded by Express Scripts Holding Co., the pharmacy benefit management, or PBM, company. PBMs often pit drugmakers against one another to get better prices for their health plan and employer clients,” according to Bloomberg.
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.
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.
Some traders may look to leveraged options to potentially capitalize on short-term surprises. For instance, the Direxion Daily Pharmaceutical & Medical Bull 2X Shares (NYSE: PILL) and the Direxion Daily Pharmaceutical & Medical Bear 2X Shares (NYSE: PILS) both follow the Dynamic Pharamaceuticals Intellidex Index, the same index tracked by the PowerShares Dynamic Pharmaceuticals Portfolio (NYSEArca: PJP).
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