If one goes by United Nations population estimates, we are living in a rapidly aging world. The global share of what we call 'seniors' (people age 65+) is expected to rise from nearly 8% in 2015 to more than 14% by 2050[i]. If one limits the focus to the 20 largest global economies, this demographic trend becomes even stronger, with the senior population in these countries expected to double from 9.61% in 2015 to 19.96% by 2050.
In Western Europe and Japan, 1 out 3 citizens is expected to be 65 years or older by 2050. The situation is not much different in many emerging markets, with at least 25% of the populations of China, Thailand, Poland and South Korea expected to be 65 or older by 2050. Although the US is expected to be better off than many developed countries in this regard, due to large-scale immigration from Latin America and Asia, its senior population share is still expected to rise significantly from 14% in 2015 to over 22% by 2050.
These data points are significant because demographic trends present a serious challenge for governments seeking to meet the healthcare needs of their aging populations. In many developed markets, rising healthcare costs over the last few decades have already created significant drags on the budgets of many governments. For example, healthcare spending in the US is approximately 8% of GDP (Japan has a similar number).
In Western Europe, healthcare spending ranges from 6.39% in Spain to nearly 9% in France (Table 1). With aging populations, it is expected that already high healthcare burdens on these often times highly-indebted governments (debt-to-GDP ratios currently range from 50% to 250%) could rise significantly over the next few decades.
Although emerging markets currently have relatively lower healthcare spending than their developed market peers, costs could rise exponentially over the next few decades driven by the adoption of broader/universal healthcare, a growing incidence of lifestyle diseases (e.g. obesity, diabetes, etc.) and a faster rate of aging populations combined with higher life expectancy.
With an expanding middle class and rising incomes, healthcare spending is expected to rise significantly. For example, despite being home to more than 66% of the global population, emerging markets contributed to only 21% of global healthcare expenditure in 2012. This share is expected to rise to 33% by 2022.
With debt levels rising for countries such as China, Brazil and Mexico, public healthcare spending is expected to create a drag on public finances. Based on the example of developed markets, emerging markets may also have to introduce some form of universal healthcare coverage at some point over the next decade, thereby again increasing spending.
Controlling Costs with Generic Drugs
The combination of increased healthcare spending and aging populations could create crippling social and economic problems for many governments around the world. An analysis of the healthcare value chain reveals that pharmaceutical companies currently generate abnormally high margins (in the range of 20%-23%) in the value chain, and there is therefore significant scope for healthcare savings by controlling drug prices.
Widespread adoption of Generic[ii] and Biosimilar[iii] drugs could help governments reduce healthcare costs and increase the reach of healthcare services without impacting innovation and interfering with market forces. The increasing penetration of generic drugs in the US has been directly proportional to healthcare savings for the US healthcare system.
For example, in 2005, generic drug penetration was 60%, resulting in annual savings of $86 billion. By 2015, generic penetration increased to 88%, with annual savings of $254 billion. These savings are significant considering that the size of the overall US prescription market was estimated at $425 billion in 2015.
Over the last few years, governments around the world have been actively promoting the adoption of generic drugs. For example, the US approved its first biosimilar drug in 2015 with an expectation of two more approvals in 2016. Japan, a nation that has often shied away from using generics, has also made significant progress in this regard. Plagued by high debt levels and home to one of the world's most demographically senior population, in recent years, Japan has started to actively promote the domestic use of generic drugs.
Japan's health ministry publicly stated a target of increasing generic drug penetration from 9% in 2007 to 30% by 2012. Although growth was lower than expected, Japan achieved a 28% penetration rate by 2013. Japan is now working towards a 60% penetration target by 2017, and according to EFPIA estimates, penetration could reach 70% by 2025.
This increasing generic penetration stands in stark contrast to the projected overall annual growth rate of 0.13% for the pharmaceutical industry from 2015-2025. In fact, the expected impact of generic drug adoption shows that generic drug promotion could be a much better option for governments seeking to reduce healthcare costs, rather than regulatory price controls, which have been shown to negatively impact motivation and R&D spending.
How to Invest
Over the next few decades, driven by global social, political and economic factors, the generic drug industry is expected to see broad-based growth. From just 2013-2018, the global generics industry is expected to grow at an annualized rate of 11.02%. The growth potential of the industry, combined with demographics and other appealing factors (such as a strong pipeline of new generic drugs), could make generic drugs a compelling investment case for long-term investors.
Leveraging its extensive research into the space, Indxx has developed the Indxx Global Generics & New Pharma Index to provide access to the companies in this industry. The index includes exchange-listed companies, on a global basis, that derive a significant proportion of their revenues (or that have the potential to derive a significant proportion of their revenues) from the generic drug industry, or that have a primary business focus on the generic drug industry. The products of these companies are pharmaceuticals that are identical, or bioequivalent in the dosage form, safety, strength, quality and intended usage to brand name pharmaceuticals.
As of April 30, 2016, the index included 78 securities of companies with a minimum market capitalization of $1 billion and a weighted average market capitalization of nearly $13.85 billion.
Indxx has licensed the index to noted New York-based asset manager and ETF sponsor Van Eck Associates Corporation for their exclusive use, and VanEck has launched an ETF tracking the index - the VanEck Vectors Generic Drugs ETF - under the symbol GNRX.
[i] Data has been calculated on the basis of numbers published by the UN in its Global Population Prospects Report, 2015 Revision
[ii] FDA Definition: A generic drug is identical - or bioequivalent - to a brand name drug in dosage form, safety, strength, route of administration, quality, performance characteristics and intended use.
[iii] FDA Definition: Biosimilars are a type of biological product that are licensed (approved) by the FDA because they are highly similar to an already FDA-approved biological product, known as the biological reference product (reference product), and have been shown to have no clinically meaningful differences from the reference product.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Indxx LLC is the index provider for the Market Vectors Generic Drugs ETF