A 130 / 30 Global Pharma Strategy

Investors who are bullish on the generic drug industry may consider implementing a 130 / 30 global pharma investing strategy through equal-weight (5% each) short positions for the six brand drug companies outlined below with 30% of their assets while investing 130% of assets in long positions among generic drug makers. The list of brand drug companies with significant patent expiration exposure over the next 2-3 years includes Pfizer (NYSE: PFE), GlaxoSmithKline (NYSE: GSK), Takeda Pharma (OTC: TKPHY.PK), Sanofi-Aventis (SNY), AstraZeneca (AZN), and Merck (MRK).

The HavRx Global Generic Drug Index is actively managed and tracks the performance of companies which meet any of the following three requirements:

1. Derive either $500 million (USD) OR more than 50% of trailing 12-month revenues from the manufacture and sale of any type of generic (off-patent) prescription or over-the-counter (OTC) drug product intended for use by humans, including contract manufacturing services for drug products and biological agents;
2. Have one or more compound(s) in active clinical development OR have a pending ANDA with the FDA for a generic drug candidate;
3. Receive FDA approval for an ANDA within the past 12 months.

The breakdown by region for the companies in this index includes U.S. (27%), India (27%), Europe (16%), China (18%), Japan (6%), and other (6%). This index has been tracked at the Investars YOU website since 6/24/09 at a starting value of $1000 and currently includes a total of 73 stocks with a last closing price of $1305.48 for a gain of approximately 30.5% on an equal-weight basis for the entire period and gain of about 15.5% in the past three months. Since there is a total of 73 stocks in the generic drug index; a semi-active ETF structure would be idea for selecting the top 30-40 rated companies on a monthly or quarterly basis through a quantitative, rules-based system.

According to IMS Health, the generic drug industry is growing at 7.8%, which is a faster pace than the worldwide market for pharmaceuticals. In addition, the National Association of Chain Drug Stores estimates that in 2007 the average retail price of generic prescription drugs was $34.34 as compared to a much higher (over 3X) average price for brand name drugs at $119.51.

Other factors in favor of the global generic drug industry include approximately $70 billion in brand name drug patent expirations through 2012, a projected increase in generic drug substitution rates from 65% to over 70%, and continued industry consolidation of small / mid-cap generic drug companies by industry leaders such as Teva Pharma (NASDAQ: TEVA), Mylan Labs (NYSE: MYL), and India-based Sun Pharmaceuticals (BOM: 524715).

Disclosure: No positions

Comments

[Dr. Bone:]

This index sounds very interesting. Is there a way you can directly invest in it. Dr. Bone

Nov 05 08:54 AM

[BioGuy:]

Good ideas, the generic pharmaceutical market will do well.

My one additional thought is to be careful shorting Merck. Not only because I think the recent Schering acquisition will help due to expanded pipeline and fairly good efficiency, but also in the spirit of bullishness on generics.
Merck will be, I think, a major player in biogenerics. They have the BioVentures Division and have made clear they are going after the big protein therapeutics. I believe they will be successful due to;
1) The current Health Care for America Act contains terms for licensure of biosimilars. One way or another there will soon be a mechanism for marketing of biogenerics in the U.S. I am surprised the data exclusivity is written as 12 years, my own game theory guess was 7 years. (See page 1537- docs.house.gov/rules/h... )
2) The fundamental business is much more important when valuating biotech/pharma. You succeed or fail largely through FDA approval due to clinical data- not raw material prices or marketing. My point is that Mercks Glycofi technology is (probably) a great advantage that should not be overlooked. Imagine Ford had robots that used less energy and worked 10 times faster than GM's robots- that is what this technology does. Currently most biologics are made in mammalian cells- expensive materials, slow. Glycofi uses yeast- cheap material, faster.... way faster. Significant not only because you produce faster, but man hours/machine hours and all processes related to manufacture are reduced. If Glycofi works as anticipated, no one will be able to touch their price. Certainly not in the case of Amgen where they still use roller bottles- which is like using a telegraph these days.
3) Which brings me to manufacturing. Many issues surrounding the production and approval of biogenerics is overstated. As I mentioned above, some current manufacturing methods are horribly inefficient- furthermore, who ever said the product and process characterization was so tightly defined? When validating and submitting a process to FDA, companies put forward the easiest process possible for their own sake. This leaves a larger target for a biogeneric manufacturer to hit. And finally, it's not THAT hard to make a similar protein when you have the current material specs right in front of you, in my personal experience. It's biology, not quantum physics.
4) The idea of "impossible" manufacturing criteria is further dispelled by the FDA's own PAT initiative. (Process Analytical Technology) A defender of the industry said something to the effect of "you can't even change the volume of your manufacturing tank". Completely false, the emphasis is now placed on final product quality, and PAT allows all justified, GMP compliant changes that improve the process. You are no longer "frozen" after Phase II trials. Not everyone is up to date on this topic, and follow-on manufacturing processes will have plenty of flexibility. I've heard it said they will have superior processes and products, and in some cases I think that is likely.

One final note, I have met some of these BioVenture people. They are bright, motivated people and will probably get the job done. No big pharma drones here. (I'll save comparisons to other biogeneric players for another time.)
I just found this article, discussing similar ideas I mentioned, so I guess I'm not alone. "But given that most generic manufacturers are ill-equipped to handle the development of follow-on proteins, some analysts think that the real opportunity is where you'd least expect, inside Big Pharma and biotech."
drugtopics.modernmedic...
(from "theRPMreport")

No positions in MRK or AMGN.
No subscription to RPM reports.

Nov 06 12:17 PM