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  • ETF Insights

    Global Names Drive Generics Returns

    John Patrick Lee, CFA, Product Manager
    January 26, 2018

    On the first trading day of 2018, the U.S. Food & Drug Administration (FDA) announced new steps to streamline the generic drug approval process in the United States. While this is potentially significant, it's notable that non-U.S. market opportunities for many generic drug companies have driven recent performance. The largest contributors to generic company stock returns have come from global names tapping global market opportunities. As of January 23, 2018, the Indxx Global Generics & New Pharma Index is up +6.7%, adding to a quiet rally in 2017 of +17.4%.

    Rapidly advancing biotechnological improvements and global synergies are boosting the returns of this health subsector.

    VanEck Vectors Generic Drugs ETF (GNRX) Top Contributors by Country
    December 31, 2016 – December 31, 2017

    Chart of VanEck Vectors Generic Drugs ETF (GNRX) Top Contributors by Country

    Source: FactSet.
    Click here for standardized performance as of the most recent calendar quarter.
    This chart is for illustrative purposes only. Historical information is not indicative of future results; current data may differ from data quoted. The table presents past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect temporary contractual fee waivers and/or expense reimbursements. Had the ETF incurred all expenses and fees, investment returns would have been reduced. Investment returns and ETF share values will fluctuate so that investors' shares, when redeemed, may be worth more or less than their original cost. ETF returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV.

    Europe: a bright spot for biosimilars and generics

    A biosimilar is a drug which is an almost identical copy of an original product manufactured by a different company. Biosimilars are much more complex than traditional generic drugs, as the biosimilar company must synthesize a completely new drug without access to the original's specific recipe. The biosimilar company tries to recreate a drug and its effects without knowing the secret formula of the original manufacturer. Their complexity also allows the drug to be priced higher than traditional generic drugs, albeit still cheaper than the brand name original. The first biosimilar was approved by the FDA in the United States in 2015, making this is a relatively new biotech development, but impediments still exist to interchangeability in the U.S. Europe, on the other hand, has been an early adopter of biosimilars, with the first biosimilar approved for use in 2006.

    The European market has emerged as a bright spot of opportunity in the generic drugs space. Foreign companies are pushing to expand further into this market, as seen by a number of key acquisitions and takeovers which occurred in 2017.

    Celltrion (South Korea) is a pharmaceutical company that specializes in the production of biosimilar drugs. Celltrion has taken market share away from original drugs in Europe. Biosimilar Truxima, which competes with Roche's Rituxan, has taken away roughly 7% of the original drug's market share. Rituxan generated $7.5b in global sales in 2016, meaning that a few percentage points of market share went a long way towards revenue production. Truxima is available in all major European markets. According to FactSet data, Celltrion was up +136% in 2017.1

    Shanghai Fosun (China) is a generic drug manufacturer based in China. In 2017, Shanghai Fosun initiated expansion into Europe through the acquisition of Tridem Pharma, a French company that specializes in drug distribution in African countries. According to FactSet data, Shanghai Fosun was up +112% in 2017.2

    STADA Arzneimittel AG (Germany) is a pharmaceutical company that specializes in the production of generic and over-the-counter drugs. In 2017, U.S. firms Bain Capital and Cinven successfully bought out the company for $6.2b. This takeover orchestrated by two U.S. firms again highlights the growth potential that international investors see in the European generic drug market. According to FactSet data, STADA was up +106% in 2017.3

    Generic drugs is a global business

    We expect generic drug companies to continue pushing the envelope with new biotechnology and a global approach. The FDA's announcement could open the door for more opportunities in the U.S. for generic drug companies, but downward pricing pressure for generic drugs could also occur as more entrants crowd the marketplace in a relaxing regulatory environment. However, the global nature of the generic and biosimilar drug sector may allow these companies to grow as domestic and international economies continue to become more integrated. We believe that VanEck Vectors® Generic Drugs ETF (GNRX) is an attractive way to gain exposure to this growing global health subsector.

    Click here for current GNRX holdings.