Nothing Generic About this Growth Industry

The global generic drug industry is poised to capture an increasing share of the market for pharmaceuticals based on key patent expirations, a focus on healthcare cost containment, the possible introduction of “bio-similar” or “bio-generic” drugs (which are copycat versions of lucrative biotech treatments), and a trend of overall prescription growth – especially in the United States with the significant demographic trend of aging Baby Boomers. Industry reports suggest that the growth rate for the unbranded pharmaceutical industry will continue to outpace both the branded and biotech drug industries. The generic drug industry is expected to maintain double digit growth rates through 2011 and reach a level of $69 billion at that time or about 20% of the total pharmaceutical industry.

In addition, key patents of multi-billion dollar brand drugs are set to expire within the next few years, including Risperdal and Fosamax in 2008, Prevacid and Topamax in 2009, Lipitor and Effexor XR in 2010, Plavix and Actos in 2011, Singulair and Seroquel in 2012. According to IMS Health statistics, generic medications accounted for 63% of all medications dispensed in the United States in 2006, representing a growth rate of over 22% for unbranded generic drugs. The National Association of Chain Drug Stores estimates an average retail price of about $32 for generic prescription drugs, representing a significant savings to consumers compared to an average retail price of $111 for brand prescription drugs.

Teva Pharma (TEVA) is the largest public company in the generic drug industry with trailing 12-month sales over $9 billion and a market cap of just under $34 billion, and it derives over half of its revenues from generic drugs. However, Teva is not a pure-play on generic drugs as the Company offers branded and specialty products such as Copaxone. Other major players that do not trade directly as public companies include the Sandoz division of Novartis (NVS), privately-held Apotex (Canada), the Greenstone division of Pfizer (PFE), and the Mallinckrodt division of Covidien (COV) (formerly Tyco Healthcare). The major companies involved in the generic drug industry are based in North America, Europe, and India. India boasts a wide a range of companies involved in supplying both finished products and chemical intermediates to the generic drug industry with shares of Dr. Reddy’s Lab (RDY) listed for trading on the NYSE with a market cap of $2.5 billion and trailing 12-month sales of $1.4 billion.

My global generic drug index and new exchange-traded fund [ETF] proposal includes a total of 34 companies from worldwide markets with market caps over $300 million and trailing 12-month sales of at least $100 million (of which over 50% must be from the sale of generic prescription medications). Performance and benchmark tracking of my global generic index since its inception on 6/15/07 reveals a return of 0.2%, outperforming all related healthcare and pharmaceutical ETFs during that time period (which experienced negative returns). Given the favorable growth outlook for the generic drug industry as compared to its brand pharmaceutical cohorts, a global generic ETF would offer investors a simple way to participate in this growth by way of a single investment vehicle that also provides the access and diversification of investing in foreign markets.

Disclosure: none