Generic Drug ETF Not So Generic

Here are some basic facts: human longevity is rising thanks to the wonders of modern

chemistry, and people are increasingly turning to generic drugs for cost reasons when they

stock up their medicine cabinet.

While there are numerous mutual funds and exchange-traded funds focused on the

pharmaceutical and biotechnology industries, nobody has honed their focus strictly on generic

drugs. But with today’s launch of the Market Vectors Generic Drugs ETF (GNRX), the fund’s

sponsor, Van Eck Global, says it has rolled out the first ETF targeting global makers of generic

drugs and biosimilars.

Generic drugs are less expensive knock-offs of brand-name, chemically synthesized drugs.

Biosimilars perform the same role with drugs known as biologics, which are medicines

generally derived from living cells. What generics are to Big Pharma, biosimilars are to

biotech––only much more complex to manufacture.

The GNRX fund tracks the Indxx Global Generics & New Pharma Index. Companies from the

U.S. represent the largest country weighting among the fund's 84 holdings, at 41 percent,

followed by India (nearly 20 percent), which has long been a leader in the generic drug space.

Roughly three-quarters of the fund’s holdings are large-cap companies.

“The idea for this ETF came about when we looked at the return profiles of BBH

(Market Vectors Biotech ETF) and PPH (Market Vectors Pharmaceutical ETF), and one of the

things that jumped out at us was the companies in there with significant generic manufacturing

capabilities were the drivers of the underlying performance of those funds,” says James Duffy,

Van Eck product manager. “When we first started analyzing this space we couldn’t believe that

nobody had a generic pharmaceutical ETF.”

Generics have become a huge global business. According to Van Eck, 88 percent of all

prescriptions in the U.S. are filled with generic drugs. That number is 55 percent in Europe and

47 percent in Japan.

And according to the Generic Pharmaceutical Association, generic drugs saved the U.S. health

care system a record $254 billion in 2014, and $1.68 trillion over the 10-year period spanning

2005 to 2014.

But while generics have helped people save billions of dollars in health care costs, have they

helped people make money from an investment perspective?

According to backtested information from Indxx, creators of the index underpinning the GNRX

fund, the Indxx Global Generics & New Pharma Index has significantly outperformed both the

S&P 500 and the S&P 1200 Health Care Index during the period from March 2005 through

year-end 2015. (The Indxx Global Generics & New Pharma Index went live in November

2015.)

Duffy says there’s little overlap––somewhere less than 10 percent––between the GNRX fund

and the Market Vectors pharma- and biotech-focused ETFs. He notes that a big factor behind

the solid performance of generic drug makers was the so-called patent cliff from earlier this

decade when a lot of blockbuster drugs lost their patent protection.

Duffy expects to see a second wave of patent expirations, this time involving biosimilars.

“What’s exciting about this space [biosimilars] is the anticipated margins are supposed to be

higher than that of their chemically synthesized counterparts,” he says. “Biosimilars are

expected to be sold anywhere from a 20 percent to 30 percent discount to the brand name,

whereas chemically synthesized generics are sold at an approximately 50 percent to 80 percent

discount.”

The GNRX fund has a gross expense ratio of 0.63 percent and a net expense ratio of 0.55

percent, which is capped until February 1, 2017.