Health Care

Generic drug ETF ailing despite political focus on high drug prices

Calls in the U.S. presidential campaign to cut pharmaceutical prices are not helping to revive a barely two-month-old exchange-traded fund that invests in shares of generic drugmakers.

In fact, low prices that define generic drugs may be the ETF's biggest stumbling block, analysts said this week.

The Market Vectors Generic Drugs ETF, which fund manager Van Eck Associates Corp launched with $2.5 million in assets on Jan. 12, has fallen 5 percent through Wednesday and has failed to attract even $1 in new money, according to Lipper.

The iShares Global Healthcare ETF, with three-quarters of its portfolio in pharmaceutical and biotech stocks, fell only 0.9 percent.

The Market Vectors fund, which tracks the Indxx LLC-built generic index, is the only U.S. ETF built on shares of generic drugmakers, which have been languishing.

Attacks on soaring drug prices by Democratic presidential frontrunner Hillary Clinton and other politicians have failed to boost profits on cheaper alternatives to patented branded drugs. Distributors like Walgreens Boots Alliance Inc are squeezing prices of generics.

"Generic drugs are essentially commodity products chosen on cost and as the purchasers consolidate and exert their leverage we would expect downward pressure," said Michael Levesque, analyst for Moody's Corp.

"There is a lot of discussion around drug-pricing reform and different initiatives such as letting Medicare negotiate drug pricing, but none of those become a reality unless Congress implements them through the passage of a law, and that has not happened despite the statements in campaigns."

Mylan NV, the Market Vectors ETF's fifth-largest holding, is off 16 percent this year after posting weak results and as investors panned the company's deal to acquire Swedish rival Meda AB. Another top holding, Endo International PLC, is off 29 percent this year in part after February earnings were dented by pricing pressure on its generic drugs.

Two of the Market Vectors fund's top three holdings, Allergan Plc and Teva Pharmaceutical Industries Ltd, have lost value this year, while the third, Sun Pharmaceutical Industries Ltd, has risen 6 percent.

Enthusiasm has faded for biosimilars, drugs designed to have properties similar to those licensed previously, during the long wait for U.S. regulatory approval.

Only one biosimilar, by Novartis AG, has come on the U.S. market. The treatment for chemotherapy side effects, designed to rival Amgen Inc's Neupogen, has been less successful than investors such as Andy Acker, manager of the Janus Global Life Sciences Fund, had expected. Amgen is Acker's top holding.

Celltrion Inc, a top-10 holding of the Market Vectors generic ETF, backs a biosimilar drug expected to win approval. The stock has rallied 30 percent this year, but that has not been enough to make up for losses in the ETF's other stocks.

Indxx LLC, whose index the Market Vectors generic ETF tracks, said 15 percent of the fund's returns come from companies that stand to profit from biosimilars, and that just half of its return comes from U.S. companies.

"You tend to see a lot of companies get caught up in" market selloffs, said James Duffy, ETF product manager for Van Eck. "This is an area that we feel may have the potential to drive a lot of growth in the near future."

(Reporting by Trevor Hunnicutt, additional reporting by Lewis Krauskopf; Editing by Richard Chang)