Look Beyond Pharma to Opportunities in Generics!
Rx for Growth: Why Generic Drugs Are Gaining Traction
A growing global population and an aging target demographic will likely drive continued demand for pharmaceuticals. Additionally, intensifying efforts to lower healthcare costs are expected to further buoy the generics industry. Generic pharmaceutical companies may benefit as government policy makers and insurers worldwide continue to seek and endorse lower-cost drug options.
Signs have shown that generic drug makers have become a disruptive force in the pharmaceutical industry. Big pharma lost approximately $49 billion to generics during the 2010-2013 “patent cliff” era, 1 when several high-profile branded drugs lost their patent protection. Over the next ten years, more than 150 drugs are expected to lose their patents, threatening more than $190 billion in brand name drug sales. 2
Currently, many generic drug manufacturers are moving into more complex products, a development that may augment their market standing. One example is biosimilars, generic copies of biologic drugs. These products are sold at higher prices (though still at a discount to their branded counterparts) and may allow for wider profit margins, potentially setting the stage for future growth among generic producers.
Yes, generic pharma does have its share of challenges to navigate, such as procedural roadblocks and potential regulatory limbo. However, there is a strong case to be made that generics present a compelling investment theme. In future articles, we will examine in more detail the various growth drivers of generic drugs, including the patent cliff and the move toward more complex products. Each represents an important opportunity for generic drug manufacturers to help change the face of the industry by altering the way drugs are brought to market and distributed in the years to come.
Market Realist – Opportunities in Generics
Aging Population: The world is changing. The proportion of people over the age of 65 years in the overall population is already rising. As you can see in the graph above, this trend is only likely to strengthen. With an older population, medical and healthcare (XLV) (IHE) costs are bound to rise. This outlook bodes well for generic drugs, as demand is likely to rise, given cost-effectiveness.
Growth of the Industry: According to IMS forecasts, global medicine spending is predicted to grow from a robust 5.2% between 2009 and 2013 to an absolute growth rate of 30% and a compound annual growth rate of ~4%–7% by 2018. 52% of this increase should come from generic drugs. As healthcare costs rise and more patents expire, the demand for generics is likely to flourish over the long term.
Emerging Markets like India: India (EPI) looks like it could be a particularly great investment opportunity. According to a report by ASSOCHAM India, the Indian generic drug market is expected to exceed $27.9 billion by 2019. It’s currently sitting at $13.1 billion. The report shows that FDA approval and the US pharma (PPH) patent cliff could mean a compound annual growth rate of ~16.3% for the domestic generic market (GNRX).
There’s a ton of opportunity in generics. The industry’s growth is likely to continue unabated as more and more drugs come off patent and more opportunities present themselves in the field of biosimilars. You might want to pay attention — not just to the overall pharmaceutical sector but also to generics. Investors looking for exposure to the generic drugs market can also find opportunity in the VanEck Vectors Generic Drugs ETF (GNRX).
To read more about the generic pharma industry, see Generics Keep Lowering Healthcare Costs: Opportunity Ahead.
“Biosimilars in Focus as Easy-to-Copy Large-Drug Expirations Wane.” Bloomberg Industry Report, November 19, 2015. A patent cliff refers to a situation when one or more of a company’s products’ patent protections expire. The expiration exposes the company’s product to external competition and potential significant loss of revenue. ↩
“Biosimilars in Focus as Easy-to-Copy Large-Drug Expirations Wane.” Bloomberg Industry Report, November 19, 2015. ↩
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