Irina Koffler joined Mizuho as Managing Director and senior specialty pharmaceutical research analyst in 2015. She was named the #1 analyst in 2015 by TipRanks, a recognition that was announced live on CNBC’s Squawk Box. We sat down with her to discuss the specialty pharmaceutical landscape, the pressures it’s facing and how the sector will evolve in the years to come.
Q: What is your outlook for specialty pharma in the next few years?
There could be a rebound next year or the year after, but I’m worried about the continued pressure on drug pricing driven by consolidation, increased competition, payers and the government. Of course, in an election year, there will be a lot more focus on the impact of government, but a variety of other factors still play a role. That makes the environment more challenging.
Q: What would be the potential impact of higher interest rates?
If interest rates rise, companies may focus on de-levering, which could lessen their interest in M&A. We also think innovative and valuable assets are relatively scarce, so the transaction flow could slow.
Q: What are the characteristics that make companies stand out in this sector?
Companies with strong pipelines, innovative technology, clean business models and those without reliance on purely financial transactions are the ones who are able to distinguish themselves and become takeout targets over time.
Q: How much has the competitive landscape changed due to current pressure on the sector?
The generic segment has grown more competitive due to pricing pressure. On the branded side, there’s been little change. Innovative technologies such as CGRP migraine agents or unmet needs such as hospital antibiotics create periodic industry excitement and stimulate pockets of competition in the branded area.
Q: How have companies adjusted their strategies as a result of anticipated pricing pressure?
Companies are modifying their payer strategies and degree of payer collaboration. Among generic companies, the consortium bidding process resulted in increased consolidation. Branded companies also spend a significant amount of time planning the execution of their co-pay assistance programs to ease patient access at the early stages of launch (to minimize the impact of hurdles such as step edits and prior authorizations), while at the same time working collaboratively with the payers to more broadly contract later in the launch cycle, as prescription volumes grow.
Q: If these pricing pressures continue, do you predict a change in the way that the sector operates?
We don’t anticipate significant change in the sector. Companies will still need to send sales representatives to doctors’ offices to promote their drugs and invest in clinical trials, so there is no opportunity to meaningfully cut costs. Companies will need to cooperate further with government and payers, and may be more measured with price increases, but otherwise we don’t anticipate major changes. As such, the operating model should remain the same.
Q: In terms of consolidation, how far along would you say we are?
There are about three or four generic companies that control most generic volume. While there is room for a little more consolidation, there aren’t huge moves to be made beyond where they currently are. On the branded side, you can have big companies picking off branded innovators, but it’s hard to quantify exactly where we are in the process. It’s definitely an ongoing theme. Large pharmas are also starting to collaborate with one another on big research programs. That’s a trend that’s worth watching, since we think it could also emerge in the specialty pharma universe.
Q: What are the most important factors you consider when looking at companies at the moment. Are there any new factors?
I look at the quality of their pipeline, balance sheet, science and management team, among other factors. When evaluating companies, business fundamentals rather than strictly financial metrics are more important to me.
Simon Hylson-Smith is a former financial industry editor and currently CEO of Paragon.
Simon Hylson-Smith is a former financial industry Editor and currently CEO of Paragon.