Innoviva, Inc. (INVA) Earnings Call Transcript & Summary

Great. Good morning, everybody. Thanks for joining us for the next session. I'm Matthew Harrison, one of the biotech analysts here. I'm pleased to have Innoviva with us for this session. Just quickly before we get started, I need to read a disclosure statement. Please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at morganstanley.com/researchdisclosures.

So with that out of the way, we can get started. So Pavel, thanks for being here. Thanks for being with us. Maybe just to kick us off, you have sort of a unique business model compared to a lot of the other companies. So maybe just talk about how you're balancing your royalty portfolio of income with some of the recent acquisitions you've made and how you're thinking about capital deployment more broadly.

Sure. Sure. Matt, first of all, thank you very much. It's a pleasure to be here. So maybe just to get started, as I think about what we're trying to do, it's a couple of different things. One is to make sure that we maximize the value of our royalty portfolio. I mean, historically, it's been the most valuable part of our business. It's still extremely valuable. And secondly, given that it's such a cash flow generating part of the business, and unlike most biotechs, we are actually very cash flow positive. It's very important for us to know how we can thus deploy capital to create value for our shareholders. And so we have done it, since I joined the company a couple of years ago, in 2 different ways. One, we have tried to address our capital structure, and we have made some pretty meaningful changes there. So for instance, last year we acquired the stake of GSK, which had about 32% stake at Innoviva for about $400 million, in a transaction, which I think was extremely strategically and economically accretive for us. Secondly, we cleaned up some of the debt. We just issued a convertible note for about $0.25 billion early this May and used some of the proceeds to refinance a note that's outstanding [indiscernible] and due in January of this coming year. In addition, earlier this year, we monetized our stake in TRC, which house TRELEGY royalties, once again, in a deal, which we believe is extremely strategically and economically attractive for us and which provided us with more dry powder. And so kind of aside from like the capital structure cleanup, the -- well, last but not the least, and I think the most important part of what we're doing -- of what we're trying to do, is to acquire novel assets in attractive areas. And there we are looking for assets -- we're looking at areas where we think that our capital and resources can make a difference. We identified hospital and infectious diseases as one of those spaces. And so over the summer, we acquired 2 assets in this space. One was the company called Entasis, which has a very differentiated kind of regulatory -- or I guess, late clinical, regular stage asset that we think has very significant commercial promise. And the second company, which we acquired was La Jolla, a company with a couple of marketed products in the hospital space. And we believe that as -- we believe that there are -- that the 2 assets are very complementary and that by combining the R&D engine of Entasis with the commercial platform of La Jolla, we can really create a ton of value. And it also gives us an operating platform, which we can further use to layer on additional assets.

Okay. Great. Good. So I guess, maybe first place to start, let's just talk about the outlook for the royalty assets. So what's the outlook for BREO and ANORO at this point? How do you think about the trajectory of those products and also the durability of those royalty streams?

Sure. Great question. And something that we've spent quite a bit of time thinking given that this has been such important sourcing of cash and value generators for us. So I think that if you look -- first of all, I think it's important to recognize that both of these are extremely well-known and broadly used assets. And so there is just a lot of inherent kind of comfort in the market with these assets. I think that oftentimes, when I get asked about these assets, people are a little jaded by what's happening in the U.S. It's actually quite important to understand that at this point, kind of a lot of the revenue -- for BREO, its most of the revenue actually comes from ex U.S. markets. And so I think that we can see some growth ex U.S. markets -- in ex U.S. markets. And I think that in the U.S., a lot of there is sort of competitive pricing pressure dynamics, especially as it relates to BREO, have played out. And so I think that the profiles of the 2 assets are quite good, and we'll continue to see very significant cash flows from those. In terms of the asset durability, we would expect these assets to be very cash flow generative for years to come. If you look at BREO, the primary patent goes on until 2025, but the secondary one, which we believe is quite strong, goes until 2030. For ANORO, it's 2030 and 2033. And besides, it's really important to understand that in these drug device combinations, manufacturing complexity is pretty extreme. And even -- if when the patents are gone, it's just challenging to get products onto the market and get them approved. And so we think that this creates a very significant moat around our assets that's going to provide us with meaningful durability.

Okay. And maybe just talk about the interplay between BREO, ANORO and TRELEGY, which is obviously the product that you sold the royalties off on. But, obviously, it's part of a suite of products that GSK sells. So what's the interplay there? And how do you think about the market share dynamics between them, if that's relevant at all?

I mean, so TRELEGY is a great product. We've been sort of very happy to be owners of that product. I think that ultimately the end -- and it's a product in the clout that has been growing pretty meaningfully. I think ultimately, there is going to be space for all 3 classes. ICS/LABA, LABA/LAMA and then the triplet. And while we might see a little bit of sort of cost pressure in some of the products, I would not be sort of extremely concerned about that.

Okay. And then when you think about ex U.S. geographies, what's been the driver of that and the relative either stability or growth that you're seeing ex U.S. versus what you're seeing in the U.S.?

So I think it's fairly product specific in terms of the pockets of growth. And also, I think the last couple of years has been a little unusual given that COVID has impacted the market meaningfully. And sort of -- and the way that COVID has flared has obviously varied from one geography to the next. Generally speaking, sort of Asia and emerging markets have more growth. And I would just expect to have -- sort of to have meaningful growth in ex U.S. markets.

Okay. Maybe just a last question, which isn't -- it's more about strategy than these 2 products. But obviously, the company was originally founded on royalty assets. You've made sort of these strategic decision to buy operating assets as opposed to more royalty assets. So why not deploy the capital to buy more royalty assets as opposed to operating assets? Or was that even part of the strategic discussion that you considered when you thought about how to deploy the capital?

Absolutely. That was a part of a strategic discussion. I would maybe address it in 2 ways. So our primary focus is sort of in acquiring and getting exposure to differentiated assets, and royalty is one way of doing it. But in many ways, just acquiring assets outright allows for more synergies and allow us one to do more things to this asset. And so kind of in that sense of control and being able to layer and combine assets was actually an important part of the decision making. Secondly, I would also like to note that the royalty space has become sort of fairly competitive over the past few years, and there are a number of players that are there, which have sustained a very low cost of capital. And being good stewards of shareholder value, we are also mindful of what our -- of how competitive things are.

Yes. Okay. Helpful. And then I guess the follow-on to that is, obviously, because you've been -- obviously, you have input on BREO and ANORO, but you haven't really been an operating company in terms of commercialization or driving those assets. So how do you think about the transition and the skills necessary in terms of transitioning to having an operating company and the functions that you need and the people that you need to be able to do that. And so, how do you build -- how do you make sure you build that expertise effectively, but also in an economic way?

Absolutely. So that's a great question. And that I'm sure something that I, kind of, we sort of as individually, collectively, we have spent quite a lot of time thinking about. I think that with acquisitions, obviously, being an operating company is -- requires a separate skill set. We -- I believe that with Entasis and La Jolla acquisitions, we actually have acquired some very good assets, but also some extremely good talent. And so being able to leverage the people and the 2 companies is actually extremely important and a significant part of our strategy. And then we have also kind of been thinking about how to enhance some of the capabilities that we have at Innoviva level. But I would like to say that we have been very cost disciplined in the past, and we will continue being sort of very cost disciplined.

Okay. And then I guess, the follow-up question of that is, your cost structure was extremely low prior to acquiring some of the new assets. So obviously, that changes your cost structure. How do you -- how should we be thinking about cost structure going forward? And how are you thinking about that? And is there a -- I guess, the real underlying question here is, should we expect you to continue to generate positive cash flow throughout this transition? Or is it possible that you're going to have to spend more money than you're bringing in?

No, I would expect us to remain cash flow positive. I think an easier -- like, an easy way to think about it is that La Jolla is sort of -- is a near breakeven company and assuming some growth in sort of in Giapreza and Xerava, one would anticipate that the company is actually going to become fairly profitable in short order. I think that with Entasis -- obviously, they are still a pre-commercial stage company, so there is going to be some investment. It's very important to note that Entasis lead product is highly complementary to La Jolla's commercial platform, which was one of the reasons that we decided to pursue this acquisition. So all in, I think that there is going to be a very clear path to profitability kind of for that combined business.

Okay. Great. So why don't we talk about then in detail. So just tell people a little bit about La Jolla. What are the assets they have and why you wanted a hospital-based sales force?

Sure. So La Jolla has a couple of assets. One is Giapreza, which is a product that has been in the market for about 3 or 4 years for shock -- septic shock. And it's very much a hospital-based product. It's been growing pretty meaningfully over the past couple of years, and we'd expect continued growth there. It's actually a very differentiated product. And the second product is Xerava, which is a product that one would use for intraabdominal infections -- complicated intraabdominal infections. And that has also been sort of a growing product. Collectively, these products have about $50 million of revenue or about -- last year, it was about $44 million of revenue. And we think that that's really important both, because these products have real growth embedded in them and we think that with appropriate resourcing, we can sort of enhance and accelerate the revenue trajectory for the products. And secondly, if you think about how you would want to commercialize SUL-DUR, it's actually going to be through the hospital channel. And so I think that being able to leverage La Jolla's commercial platform is actually going to be sort of very meaningful and derisking for being to -- for being able to get Entasis lead asset SUL-DUR to market, and be able to generate meaningful revenues from that.

Okay. And broadly, the outlook on the La Jolla products -- just, I don't know, talk to us about growth trajectory, how far they're penetrated? What the competitive dynamics are for each of those products?

Sure. So I think that with Giapreza, it's effectively -- it's currently used primarily as a third line, almost like a salvage therapy for septic and other distributive shocks. We think that there is actually an opportunity to move them a little bit early in the line. But obviously, these things kind of would need to be determined. We've only owned La Jolla for less than a month now, and we're conducting a fulsome business review to make sure that we -- that we better -- that we can better sort of appreciate the commercial opportunity there. But it seems fairly clear that there could be -- that there's an opportunity to meaningfully accelerate it with appropriate resourcing. I think with Xerava, it's -- I mean, Xerava in many ways is -- well, Xerava is a fourth generation tetracycline, and it has some non-inferiority data that's pretty good, and it also has a more benign safety profile than third-generation tetracyclines. And so we think that it's being used as a replacement for some of those treatments. But antibiotic treatment paradigms are sort of very complex, and so it's difficult to kind of pinpoint exactly market share in each segment.

Sure. Sure. And just in terms of where they are in access and reimbursement are [ booked ] through sort of all of the formulary and hospital P&T issues, and you feel like you have broad access and so now it's about just driving demand? Or is there still an access component that you need to work through?

So we -- so I think that they are sort of in a pretty good place. But at the same time, there's going to be more work to be done for us on all fronts, which we think is actually going to improve the revenue profile.

Okay. And then, La Jolla, you talked about sort of being close to breakeven and hopefully turning profitable. Are there investments you're going to make there, which -- I guess, all I'm asking is, how should we think about investments or any synergies you expect from that business?

So I think that there will be 2 kinds of synergies. One is going to be kind of the G&A synergies, because, obviously, we're effectively combining 3 companies, Innoviva, La Jolla and Entasis, and so there are certain synergies that one would expect. Secondly, and I think importantly, there are going to be commercial sort of non-incurred expenses, which one could come to synergies. Because in order to commercialize SUL-DUR, one would need to develop a pretty meaningful hospital and commercial presence for Entasis and La Jolla gives us that. So I think that all-in kind of we're going to be -- we're still going to remain a compact organization. We might make some adjustments to the resourcing and also to the -- a little bit of the commercial structure to make sure that kind of we transition from a 2-product company to a 3-product company kind of once SUL-DUR is approved. But we are not going to dramatically increase expenses.

Okay. So why don't we talk about SUL-DUR and just remind people what its clinical profile is, why you're excited about that asset and where it plays sort of in the paradigm.

Sure. So it's a very differentiated asset. It's an asset -- it's a drug that could be used for carbapenem-resistant Acinetobacter patients. And these patients are -- don't really have a lot of options available to them. There is really nothing on label for these patients. And this is a disease that has very high mortality. So it's potential in the order of 40% to 50%, so it's a really very deadly disease. And there are a couple of different things that are used for it. One of them is Colistin, which for anybody who kind of started antibacterials, it appears to be just a very poorly tolerated and not a particular effective drug. So, SUL-DUR in their clinical trial proved a couple of things. They were running a non-inferiority trial, and they were able to get to a numeric, but not statistical superiority, which is actually very important. And I think that would be seen as compelling in the eyes of physicians and hospitals. And also, they have very clear data with regard to a better safety profile that I think is also going to be quite important for anybody who has been using sort of Colistin. And so we're very excited about -- it's a fairly targeted market. It's a market where there is very significant mortality and very few good treatment options, pretty much no treatment options. And this is a drug which could actually play very well in the market.

Okay. And path to approval here, what does that look like?

So the -- so we completed Phase III clinical trial at the end of last year. We are going to file with the FDA later this year with -- depending on sort of the priority status and all that with the potential approval kind of mid next year.

Okay. And just, I guess, just remind everybody, CMC, manufacturing, supply, all of those sort of factors that you need to prepare for, you feel good about sort of where you are in terms of those?

Yes. The company has been working. The company has a very strong manufacturing and CMC team and that it's been in working sort of curious over the past couple of years and making sure that all of these things are lined out.

Okay. And part of the reason I ask, obviously, is some of the APIs, especially for antibiotics comes from China, and there was -- there were issues for supply chain there. So any -- I assume there are no issues related to supply chain that you're aware of.

Yes. That is correct.

Okay. So I guess, then the follow-up to that is, there's been a handful of novel antibiotics that companies have tried to launch. It's been a pretty tough area to launch new drugs. So I guess, what are you doing to try and overcome some of those obstacles? And just how are you thinking about the marketplace?

Sure. It has been a fairly challenging marketplace. And obviously, we're aware of that, and we have spent quite a bit of time thinking about how are we different? And I think, to me, it comes to 2 things. One is product and other one is capabilities. And I think that a lot of products that have been launched recently and especially those that have faced lackluster launches, were fairly undifferentiated products where it was difficult to pinpoint, kind of, how or why they would be -- they should replace existing therapies. I think that in the case of SUL-DUR, the product profile is very differentiated. And so the case we use is actually pretty compelling and simple. And secondly, I think it comes down to capabilities. And if you look at kind of at a number of launches over the past couple of years, these were single product, sort of small biotech companies trying to launch products by themselves. That's relatively difficult to do, because you have to build kind of your new capabilities and do it in a fairly resource-constrained environment. And by the way, do it in an environment where COVID might be limiting market access. I think that with the La Jolla acquisition and their commercial platform and with our kind of long-term vision and resources, we are likely to have a much more -- much better launch.

Okay. And I guess the last question here on this topic is just more broadly in terms of access as you think about some of the access challenges that people had and some of the pricing challenges that people had, I guess -- and the market -- I'm not asking to give sort of guidance on what sales could be. But how do you think about this as a -- because I think the context is important here, right? Some people look at this and they say, unmet need, you can look at the number of patients, and you can get to pretty big numbers. But is your expectation more modest than that, how are you thinking -- I guess, maybe I should just be more simple on the question. How are you defining success with this product? How are you going to think about success with this product? What's your goal in terms of what you can be able to achieve with this product?

Sure. So we expect the product to be meaningful kind of in the context of our revenue profile. If you think about the number of patients, it's a pretty targeted market. I think that Entasis in the past has been talking about 20,000 to 40,000 CRAB patients in the U.S., and let's say, 50,000 to 60,000 CRAB patients in the EU and adjacent states. So it's a pretty targeted market. We think that we have a premium product that could sort of warrant premium pricing, but we haven't really disclosed anything to that effect yet.

Okay. And so maybe in the last couple of minutes, just talk about further areas you're thinking about investment. Obviously, you've acquired these 2 companies. Should we expect to see you to acquire more companies? Are they going to be focused on hospital-based products? Are you going to think about other kinds of products? Just what's the strategy and how you're thinking about further capital deployment?

Sure. That's a great question. And I mean, as always, we are very -- we try to be very diligent and deliberate about on capital deployment and really try to think through everything. In terms of asset acquisitions, with La Jolla and Entasis, because we're combined entity, we have a very strong operating platform. And so we're going to be looking at assets that we might potentially layer onto that platform and -- because we'd like to take advantage of synergies when we see them. Having said that, I think right now is a period of -- it's a very strong market dislocation. But then in terms of where assets trade versus kind of their fundamental value, and so we'll also try to be thoughtful about what other assets outside of, let's say, like infection disease space, might be accessible to us. And so from that perspective, we'll continue what we have been doing for the past couple of years.

And is the focus going to remain on hospital-based products only? Or would you consider expanding outside of hospital-based products?

We could potentially expand outside of hospital-based products. I mean, to us, ultimately, it comes down to product differentiation, being able to acquire really promising assets at attractive valuations. The synergies that I think could result from acquiring a hospital-based infectious disease product are meaningful. And so kind of they would -- so it will be important for us to look at assets in that space, but we could also do other things as well.

Okay. Great. Well, perfect. Pavel, thanks for being here. I appreciate the time. Thanks for answering the questions.

Matt, thank you very much.