Mergers and acquisitions have been one of the key drivers behind the healthcare sector's leadership during the current bull market. That catalyst has been dealt a blow at the hands of the U.S. government's efforts to crack down on inversion deals, but that does not mean healthcare M&A activity is dead.
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Far from it, and some of the sector's exchange-traded funds are uniquely positioned to benefit from ongoing healthcare consolidation. The VANECK VECTORS ETF TRUST GENERIC DRUGS ETF (GNRX) is one such ETF.
A Closer Look At GNRX
GNRX, which debuted in January, tracks the Indxx Global Generics & New Pharma Index. That benchmark 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 is the only ETF dedicated to generic pharmaceuticals makers. The weighted average market value of GNRX's 79 holdings is $13.9 billion, meaning the ETF is full of potential buyers and sellers assuming more industry consolidation comes to pass.
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It likely will, particularly in the biologics and biosimilars space, an area that GNRX offers unique exposure to.
The Generic Potential
As pipelines improve, big pharma is seeking out individual therapeutics and smaller biotech companies to bolster drug portfolios. While patent expiries are not terribly onerous near term by historical standards, strengthening innovative drug portfolios is seemingly a preferable strategy as bigger M&A deals struggle to close, said Fitch Ratings in a recent note.
Significant growth is expected for biologics and a looming patent cliff could launch a new wave of revenue growth for GNRX constituents as biosimilars come to market.
The biologics patent cliff over the next decade could add to a new group of affordable generics or so-called biosimilars. Biologics are drugs derived from animal or other biological sources to treat diseases, as opposed to chemically based pharmaceuticals, according to ETF Trends.
Possible Interested Parties
Potential buyers in GNRX's lineup include Israel's Teva Pharmaceutical Industries Ltd (ADR) (TEVA) and Mylan NV (MYL), companies that among other GNRX holdings, have previously displayed acquisitive ways.
Biologics accounted for 12 of the 2015 approvals versus 10 during 2014. Of the approvals, more than half were drugs to treat cancer (33 percent), cardiovascular disease (17 percent) and infections (8 percent). We expect approvals to remain relatively strong in the intermediate term, despite lagging during the first four months of 2016. Eight NMEs have already been approved through April this year, according to Fitch.
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