Big Pharma Goes Generic

Sanofi-Aventis (SNY) is now the 11th largest generic drug maker in the world following its successful acquisition of Czech generic drug company Zentiva. As $70B in brand drug patents are set to expire through 2012, big pharma companies are hedging their bets through generic drug divisions, including Pfizer (PFE) - Greenstone, Novartis (NVS) - Sandoz, and the recently announced Merck (MRK) BioVentures which will specialize in bio-generics.

Elsewhere in the industry, India-based Ranbaxy (RANBAXY.NS) lost about 20% of its market value today on word the FDA would not review new generic drug product applications from one of the Company's facilities amid charges of fraud that involved falsifying shelf life data.

The 12 U.S. listed generic drug makers included in the ETF Innovators Global Generic Drug Index include Mylan Labs (MYL), Caraco Pharma (CPD), Lannett (LCI), Hi-Tech Pharmacal (HITK), Teva Pharma (TEVA), Taro Pharma (TAROF.PK), Impax Labs (IPXL.OB), Dr. Reddy's Lab (RDY), Par Pharma (PRX), Perrigo (PRGO), Momenta Pharma (MNTA), and Watson Pharma (WPI).

Two major privately held generic drug makers are currently on the sell block, including Actavis and Ratiopharm, while Taro is involved in a hostile tender offer by India's Sun Pharma (SUNPHARMA.NS) - which already owns a majority stake (76%) in Caraco. In addition, seven of the 12 U.S. listed generic drug makers have market caps less than $500M, making them takeover targets for the larger players in the industry such as TEVA and MYL or big pharma companies interested in entering the space.

Favorable growth trends for the generic drug industry include nearly $70B in brand name drug sales with patent expirations through 2012, a push to increase generic substitution rates from 65% of all prescriptions dispensed to over 70%, continued industry consolidation of small and mid-cap companies. Also, three generic drug firms (TEVA, MYL, and WPI) have recently posted strong operating results and the basket of a dozen U.S. listed generic drug stocks lost about 10% on an equal-weight basis in the past year.

This performance compares favorably to the big pharma dominated Pharmaceutical HOLDRs (PPH) and the Healthcare Sector SPDR (XLV) - with each of these funds down about 24% in the past year. The global generic drug industry is an excellent candidate for a new ETF idea as the industry fundamentals and consolidation make for a compelling investment theme.

Generic drug makers also received bullish news today President Obama's budget proposal to set up a faster pathway for bio-generics and other provisions such as ending evergreening, whereby brand drug companies reformulate their products to extend the life of their patents.

Biological agents are projected to reach sales of $100B by 2011 with faster growth of about 18% annually compared to traditional drug products. Shares of major biotechs slumped today, with Amgen (AMGN) down 10% while Biogen Idec (BIIB), Gilead Sciences (GILD), and Genzyme (GENZ) lost 5-6% on the day.