Generic ETF In Focus As Biotechs Lose Charm

Includes: GNRX
by: Zacks Funds

Since the beginning of the year, the biotech sector has been caught in a nasty web of industry-specific headwinds and global factors like weak emerging market currencies and a strong U.S. dollar. In fact, several biotech ETFs touched new 52-week lows during this period, reflecting the bearish mode of the sector.

The sector had its share of setbacks last year, with pricing concerns remaining a major issue, which are expected to resurface in 2016. Democratic presidential hopeful Hillary Clinton's "price gouging" tweet triggered a massive sell-off in healthcare stocks in September 2015. Apart from that, Clinton has also laid out a plan to lower healthcare spending. This includes reducing the market exclusivity for biologics from 12 years to 7 years and funding the FDA's Office of Generic Drugs to clear out their multi-year generic drug approval backlog. Mixed fourth-quarter results posted by biotech companies failed to regain investor confidence.

Thus, the time is now ripe to take a fresh look at the generic drug manufacturers. Generic drugs are generally significantly cheaper versions of branded drugs. The importance of generic drug manufacturers can't be denied considering that generic drugs constitute approximately 88% of the prescriptions dispensed in the U.S. and account for only a third of total prescription drug costs, according to a Generic Pharmaceutical Association (GPhA) report.

Meanwhile, a large number of branded pharmaceuticals have gone off-patent, and many more are set to lose patent exclusivity in the next few years. GlaxoSmithKline's (NYSE:GSK) Epzicom and AstraZeneca's (NYSE:AZN) Crestor are among the drugs that are set to start facing generic competition later this year. Generic versions of these drugs are expected to rake in multi-million dollar revenues.

Meanwhile, the biosimilar space is also heating up this year. In February 2016, the FDA's Arthritis Advisory Committee recommended the approval of Pfizer Inc.'s (NYSE:PFE) experimental biosimilar of Johnson & Johnson's (NYSE:JNJ) Remicade (infliximab). Shortly afterwards, rights to the biosimilar was lapped up by Novartis' (NYSE:NVS) generic arm, Sandoz, in the European Economic Area (EEA) from Pfizer. Remicade recorded revenues of $6.6 billion in 2015. September 2015 saw the first U.S. launch of a biosimilar in the form of Sandoz bringing a biosimilar version of Amgen's (NASDAQ:AMGN) Neupogen to market. Several other companies are looking to introduce biosimilars in the U.S. as well.

There is a lot of consolidation going on in the generic industry as well. Teva Pharmaceutical Industries Limited (NASDAQ:TEVA) is set to buy Allergan's (NYSE:AGN) global generic pharmaceuticals business for a total of $40.5 billion. Generic drug marker Mylan (NASDAQ:MYL) is also quite active on the deal-making front.

The above-mentioned factors have brought the spotlight on the generic exchange-traded fund Market Vectors Generic Drugs ETF (NASDAQ:GNRX), as the sector offers some good investment opportunities.

GNRX in Focus

The fund tracks the performance of the Indxx Global Generics & New Pharma Index, thereby providing exposure to companies that generate or have potential to generate a significant proportion of their revenues from the generic drug industry or that are focused primarily on the generic business. The fund, lunched on January 12, 2016, is the first ETF focused specifically on generic manufacturers.

Teva (8.5%), Allergan (8.4%) and Mylan (5.4%) are placed among the top 5 holdings in the fund, which has a basket of 84 securities. Country-wise, U.S. stocks have the highest weightage of 39.7%, followed by India (20.2%). The fund has an asset base of $2.3 million and trades in an average volume of nearly 2,000 shares a day. It has an expense ratio of 0.55%.

Although the fund is down 9.4% in the one-month period (ended February 12, 2016), it compares favorably to some biotech ETF majors like the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) and the SPDR S&P Biotech ETF (NYSEARCA:XBI), which lost 13.8% and 17.3%, respectively. Thus, GNRX provides a lucrative alternative to investors looking to park their fund in this niche of the healthcare space.

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