• March 2, 2016 at 2:19 am

    A growing global population and an aging target demographic will likely drive continued demand for pharmaceuticals. Additionally, intensifying efforts to lower healthcare costs are expected to further buoy the generics industry. Generic pharmaceutical companies may benefit as government policy makers and insurers worldwide continue to seek and endorse lower-cost drug options.

    Signs have shown that generic drug makers have become a disruptive force in the pharmaceutical industry. Big pharma lost approximately $49 billion to generics during the 2010-2013 “patent cliff” era, [6] when several high-profile branded drugs lost their patent protection. Over the next ten years, more than 150 drugs are expected to lose their patents, threatening more than $190 billion in brand name drug sales. [7]

    Currently, many generic drug manufacturers are moving into more complex products, a development that may augment their market standing. One example is biosimilars, generic copies of biologic drugs. These products are sold at higher prices (though still at a discount to their branded counterparts) and may allow for wider profit margins, potentially setting the stage for future growth among generic producers.

    Yes, generic pharma does have its share of challenges to navigate, such as procedural roadblocks and potential regulatory limbo. However, there is a strong case to be made that generics present a compelling investment theme. In future articles, we will examine in more detail the various growth drivers of generic drugs, including the patent cliff and the move toward more complex products. Each represents an important opportunity for generic drug manufacturers to help change the face of the industry by altering the way drugs are brought to market and distributed in the years to come.

     

    Market Realist – Opportunities in Generics

    • Aging Population: The world is changing. The proportion of people over the age of 65 years in the overall population is already rising. As you can see in the graph above, this trend is only likely to strengthen. With an older population, medical and healthcare (XLV) (IHE) costs are bound to rise. This outlook bodes well for generic drugs, as demand is likely to rise, given cost-effectiveness.
    • Growth of the Industry: According to IMS forecasts, global medicine spending is predicted to grow from a robust 5.2% between 2009 and 2013 to an absolute growth rate of 30% and a compound annual growth rate of ~4%–7% by 2018. 52% of this increase should come from generic drugs. As healthcare costs rise and more patents expire, the demand for generics is likely to flourish over the long term.
    • Emerging Markets like India: India (EPI) looks like it could be a particularly great investment opportunity. According to a report by ASSOCHAM India, the Indian generic drug market is expected to exceed $27.9 billion by 2019. It’s currently sitting at $13.1 billion. The report shows that FDA approval and the US pharma (PPH) patent cliff could mean a compound annual growth rate of ~16.3% for the domestic generic market (GNRX).

    There’s a ton of opportunity in generics. The industry’s growth is likely to continue unabated as more and more drugs come off patent and more opportunities present themselves in the field of biosimilars. You might want to pay attention — not just to the overall pharmaceutical sector but also to generics. Investors looking for exposure to the generic drugs market can also find opportunity in the Market Vectors Generic Drugs ETF (GNRX).

    Disclosures: Please note that Van Eck Securities Corporation offers investment products that invest in the asset class(es) in this article. An investment in generic drugs may be subject to risks which include, among others, the development, protection and exploitation of intellectual property rights, expiration of patents and inability to enforce intellectual property rights, significant costs associated with research and development and speculation that those investments will result in profitable products, arduous regulatory approval processes, rapid and significant technological change, uncertainty of reimbursement status by third-party payers such as Medicare, Medicaid and private health insurance plans. Foreign and emerging markets investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, changes in currency exchange rates, unstable governments, and limited trading capacity which may make these investments volatile in price or difficult to trade. Medium-capitalization companies may be subject to elevated risks.

    Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

    The content Market Realist publishes should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of VanEck.

    SOURCES

    [1] “Trends in Prescription Drug Use Among Adults in the United States from 1999-2012.” The Journal of the American Medical Association, November 3, 2015, http://jama.jamanetwork.com/article.aspx?articleid=2467552
    [2] “Generic Drug Savings in the U.S. Seventh Annual Edition: 2015.” Generic Pharmaceutical Association, http://www.gphaonline.org/media/wysiwyg/PDF/GPhA_Savings_Report_2015.pdf
    [3] Regulatory Efficiency Report 2015.” European Generic and Biosimilar Medicines Association, http://www.egagenerics.com/EGA_Regulatory_Efficiency_Report/#1/z
    [4] “Country Overview: Generic Share (%) by the Ministry of Health, Labour and Welfare Drug Price Survey.” Japan Generic Medicines Association, September, 2013, http://www.jga.gr.jp/english/country-overview/genric-share-by-mhlw/
    [5] “India’s pharma sector pips global growth: report.” Live Mint, December 1, 2015, http://www.livemint.com/Industry/aB3apnr59a8ZFP3aXawuYM/Indias-pharma-sector-pips-global-growth-report.html
    [6] “Biosimilars in Focus as Easy-to-Copy Large-Drug Expirations Wane.” Bloomberg Industry Report, November 19, 2015. A patent cliff refers to a situation when one or more of a company’s products’ patent protections expire. The expiration exposes the company’s product to external competition and potential significant loss of revenue.
    [7] “Biosimilars in Focus as Easy-to-Copy Large-Drug Expirations Wane.” Bloomberg Industry Report, November 19, 2015.