The Prescription For Generic Drugs ETF

The health care sector, the third-largest sector weight in the S&P 500, is bouncing back in an impressive fashion this year after posting its first annual loss last year since 2008. While diversified health care exchange traded-funds are up 14 percent or more year to date, some more focused health care ETFs are lagging.

For example, the VanEck Vectors Generic Drugs ETF (NASDAQ:GNRX) is down about 1.5 percent year to date. GNRXX follows the Indxx Global Generics & New Pharma Index, which is intended to track the overall performance of companies 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, according to VanEck.

GNRX debuted in January 2016 as the first ETF dedicated to generic drugmakers. The ETF holds 41 stocks, more than half of which are U.S. are India-based companies.

Pressure On Generics

Fundamental and macro factors highlight why GNRX and some of its components are struggling this year.

Weaker operating outlooks for large US generic drug manufacturers primarily reflect an ongoing shift in the industry pricing environment, said Fitch Ratings in a recent note. Continuing price pressure, resulting from both increased generic drug supply, delay in new product launches and customers’ improved purchasing power, will likely pressure margins and credit metrics for leading manufacturers into 2018.

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Mylan N.V. (NASDAQ:MYL) and Teva Pharmaceutical Industries Ltd. (NYSE:TEVA) are among the problem children in GNRX. Proving that the ETF has been a vastly superior bet to some of its member firms, Mylan and Teva are down 19 percent and 52.8 percent, respectively, year to date. Last week, Mylan offered up bearish 2017 guidance.

he revised outlook primarily reflects the delay launching two key anticipated products generic Advair and generic Copaxone and persistent price erosion for generic drugs in the company’s North American segment. Mylan’s weak 2Q17 results were signaled a week earlier by its competitor, Teva, which reported weak 2Q17 results, said Fitch. Teva’s results also reflected the more thorny industry environment, including price erosion for its generic drugs and delays in product launches.

Other Hurdles

There are factors conspiring to hold GNRX back.

A few factors are working together to hinder manufacturers’ pricing power, notes Fitch. First, purchasers of generic drugs have stronger negotiating power, due to industry consolidation and the formation of purchasing alliances. Second, increased supply is playing a role, as the FDA accelerates approvals of multiple generics. The combined effects of these challenges are likely to persist in the near term and remain key credit issues for both Mylan and Teva.

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Teva and Mylan, the largest and fourth-largest holdings in GNRX, combine for 13.6 percent of the ETF’s weight.

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