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Since I first wrote about my idea for a new generic drug exchange-traded fund (ETF) nearly two years ago, the global index of 80 stocks has been a strong performer as it catches up with the strong underlying fundamentals for the generic drug industry which are outlined below.
1.) approximately 70% of all prescriptions in the U.S. are filled with generic drugs;
2.) IMS Health estimates $135 billion in branded drug sales (including $90 billion in U.S.) will face generic competition / patent expiration over next five years (including blockbusters such as Lipitor and Plavix);
3.) IMS Health estimates $42 billion in global generic drug sales in 2011, representing growth from an expected $28 billion in global sales in 2009 and $17 billion in 2008;
4.) IMS Health estimates that the generic drug industry is growing at 7.8%, which is a faster pace than the worldwide market for pharmaceuticals; and
5.) 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.
The HavRx Global Generic Drug Index is passively 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 revenue 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, active pharmaceutical ingredient (API) suppliers, and intermediate product suppliers 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; and
3.) Receive FDA approval for an ANDA within the past 12 months. The index excludes all companies that derive over 50% of trailing 12-month revenue from the sale of patent-protected or legacy brand prescription or OTC drug products.
Approximately 75% of the companies in the index are based outside of the U.S. (including many small / mid-cap stocks based in China and India), which strengthens the case for a Global Generic Drug ETF since it would provide average retail investors with a cost-efficient means to trade the entire industry in a single investment vehicle. The accompanying tables include statistics for a semi-active generic drug ETF that would be rebalanced on a quarterly basis and equally weighted among active components with a market cap of at least $200 million and three-month average daily trading volume of at least 30,000 shares, in addition to the 15 largest index components by market cap.
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As of late November, 55 of the generic drug index component stocks met these requirements with an average stock price gain of approximately 95% over the past year and over 15% gain for the entire index in the past three months. Generic drug stocks have outpaced the overall healthcare sector and related ETFs, such as the PowerShares Dynamic Pharma (NYSEARCA:PJP), iShares DJ US Pharma (NYSEARCA:IHE), Pharma HOLDRs (NYSEARCA:PPH), S&P Pharma SPDR (NYSEARCA:XPH), Healthcare Sector SPDR (NYSEARCA:XLV), iShares Nasdaq Biotech (NASDAQ:IBB), and SPDR S&P Biotech (NYSEARCA:XBI).
A Global Generic Drug ETF would also provide instant, diversified access to the small / mid-cap generic drug makers and suppliers that are tracked in this index and the subject of possible acquisitions by leaders in the industry such as Teva Pharma (NYSE:TEVA), Mylan (NASDAQ:MYL), Watson Pharma (WPI), and even big pharma companies such as Novartis (NYSE:NVS) and Pfizer (NYSE:PFE) that have significant generic drug divisions.

Disclosure: No positions