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

Welcome to the afternoon session of the Goldman Sachs Healthcare Conference. We are very pleased to have on stage with us Innoviva with CEO, Pavel Raifeld. I'm joined by my colleague, Roger Xu, who is here and will -- does all the hard work for our team and basically on Innoviva, and we will get a sense for a unique company that I think a lot of folks probably don't know about much about. So I'll ask all the big picture questions, while Roger, who does a lot of work thinking about sort of the details of what's happening in the trenches with kind of the strategic changes there.

So Pavel, to begin with, just maybe just give us a snapshot of Innoviva. In particular, I think it's really interesting in terms of the recent history is like, where did you guys come from? And what are you now? Because there is a subsequent after thought in terms of -- follow-through in terms of and where are you going? So maybe start from the beginning.

Perfect. Thank you very much. I really appreciate the opportunity to be here and speak with you guys. So I think you rightly noted that we are a bit of an unusual company. And I think that our story is that we came from our origins as a royalty asset management company. And we've been generating sort of several hundred million dollars a year. And of course, which is fairly unusual for a biotech company. And so we -- and so over the past couple of years, as we've been thinking about how to deploy capital, we've done a number of things. We cleaned up our capital structure. And then we also made a few investments, and in particular, started building an operating platform in the hospital and infectious disease space. And I'm sure that you are going to be asking some more questions about that, especially given the recent news. But I think in general, it's very important to note that we are very thoughtful and disciplined capital allocators who are very focused on creating value for our shareholders. And I think that we've done much over the past quarters and years to do that.

And also tell us a little bit about you. If we think about Innoviva, when Roger and I and my team first began to know the company, it was a very -- it was an interesting inflection point. You guys had not necessarily leaned in and committed to applying the capital in the strategic direction that you have. And therefore, by default, you, your decision-making, how you think is really definitional to sort of what shareholders should understand in terms of the direction the story will take, communication, setting of expectations, et cetera. So let's start with a little bit of who is Pavel?

Sure. Very happy to share that. Although I would want to say that Innoviva is, of course, larger than I am, and there is a team that's supporting and driving a lot of the things that we are doing. So I've been with Innoviva for the past 3 years, and it's really been a great privilege to lead this organization and oversee transformation. Prior to that, I spent several years as a life sciences investor focused primarily on public equities. And before that, I spent several years as a life sciences banker, primarily focused on M&A, and I completed over $50 billion of deals, which is how some bankers measure themselves. And prior to that, I was a management consultant, also focused on the life sciences industry and working across a host of issues from corporate finance to commercial to other things. And so through decades of those experiences, I've really developed an appreciation for the complexity of the health care sector and of life sciences. And I think that a lot of those experiences and a lot of the things I've seen at other companies have really informed sort of how I think about value creation.

And one thing that I don't want to let you pass over is that the element of the sort of the environment that -- from which you came and everything from your consulting background, your corporate finance, M&A, strategic. There has been a flavor to it that has had a bit of an activist bet, I think. And I think that that's undeniably one aspect of the Innoviva story in terms of -- including where you came from, from an investor standpoint, the makeup of the Board. And I bring that up in a sense that there's some unique aspects to the story and there's some unique really tough challenges that you guys are taking on. And so it's maybe a little bit of a mindset thing of an active investor as opposed to -- it's just clearly a spectrum and maybe I'm being unfair. But it's not like a passive, oh, we just do this, and do our study, keep our head down, the FDA will do all these things. So maybe talk a little bit to this flavor of some of the activist heritage, so to speak, of you, the organization, the company, the genesis, the progression?

Sure. So maybe one thing to note is that activism is, from my perspective, is a tool, but the activist mindset that you mentioned is actually something very important. It's something that I think a number of companies in life sciences and beyond could find. And to me, this is -- this comes to a few different things. It's unrelenting focus on value creation, it's cost discipline and it's thinking strategically about the company's direction. And to me, all of those things are something that's going to benefit shareholders, which is why shareholders have oftentimes been supporting activists. So I think what you might be referring to is that about 5 years ago, that was proxified between sort of prior management of Innoviva and Sarissa, an investment fund. And as a result, in the aftermath of that event, Innoviva sort of hired -- instituted a Board that has had more of an activist mindset behind it. And I think that this philosophy has served us well as we try to really create value for shareholders and make sure that we leave no stone unturned.

And I think that's interesting because people can map out strategies and have plans and sort of set time lines. In some instances, it's pushing against strings because there has to be a pull on the other end. And sometimes, it's pulling against things that are tethered across various resistance points in terms of maybe not necessarily confrontations but challenges that go around it. So I think that's valuable for investors to think about because I think the shareholder mindset also should be one that incorporates the need for a more adaptable time frame. So many of the investors, particularly in the specialist community depend upon is just like what's the quarter, what's the number, have they met their goals for the year, et cetera. And yet the journey that you're pursuing and the skill set you bring to bear as well as the team involves maybe less predictable aspects to a certain extent. What gives you confidence in the decisions that you've made? And just because of maybe all those frameworks, which maybe are not fair, but I think it's certainly the way that I'm observing.

So that's a great question. So to me, our -- I mean I and the rest of the management team serves sort of at the pleasure of the Board, who are there because of the shareholders. And our ultimate focus is shareholder value creation. And in taking our shareholder value creation -- in thinking about shareholder value creation, we actually take a longer-term perspective. And I think that's one of our competitive advantages because it affords us potentially greater sort of greater flexibility. And also I think that using long-term value creation is a guiding light, is often a philosophical and appropriate thing to do. Having said that, we aren't patient, in that we want to get things done, and we want that shareholder value delivery to happen sooner rather than later, hopefully, much sooner. And that's an important component of my DNA. And I think that if you look at the 3 years over which kind of I've been with the company, we really have deployed a lot of capital, say, to the tune of $0.5 billion a year, which for a company of our size is very meaningful. And we've really transformed the company in a very material way. And I think that's a testament to the energy and the focus which we apply to the business.

I'll do one more line of sort of a broader question before turning it over to Roger to really just sort of get into the sort of the meat and the muscle of your actual business that you're directionally heading. But the direction that you're heading encompasses a very important task, and that is addressing the fact that bacteria don't really care that the antibiotics that we have are becoming increasingly resistant. So just approaching the whole realm of saying we're going to apply our resources, capabilities, et cetera, towards the development of antibiotics that have become resistant. The Burroughs, Glaxo, Wellcome Trust and Gates Foundation, all of these major entities, very, very serious entities, have been ringing the alarm bell over the need to invest. And the industry has done the exact opposite with showing with their feet where they're going, the reduction in the levels of R&D spending, the commercial organizations have pretty much been unwound. I think it was Cubicin from Cubist was the last blockbuster antibiotic. And that also then had a fairly dramatic kind of strategic sort of story when it was acquired on that day from Merck. But again, it's just one of these things that like mankind needs this, but it's a really tough business case, stocked by all sorts of treachery on the regulatory front, the commercialization abilities, et cetera. So wow, you guys are taking this on. How do you get to that decision? And am I like making it up too dramatic and you guys actually have some view to how to thread that needle and find a path?

Well, yeah -- I mean I think we're certainly trying to thread the needle and find a path. We -- our goal is to do well by doing good. There are -- the antibiotic space and resistance in general is obviously a top public concern. And that's stemming from a very significant unmet medical need, and frankly, unmet medical need is also how we think about opportunities because to me unmet medical need oftentimes is correlated with commercial opportunity and value creation, not always but very frequently. And so as we're thinking about this space, and by the way, I think our presence is larger. It's more of a hospital-focused as opposed to the specific anti-infectious focused. But as we have been thinking about it, it occurred to me that a number of companies that have had challenges in the space were facing 2 issues. One, potential lack of asset differentiation; and the second one was sort of scale and capabilities. The lack of asset differentiation is that it's actually fairly tough to be able to successfully commercialize a sort of potential undifferentiated commercial asset as a broad empiric therapy against the backdrop of the presence of relative and expensive generics and also antimicrobial stewardship concerns, right? Our products are very different. Like the products, and I'm very happy to talk about that, but they are differentiated, and we pursue a slightly different approach, which we think would bode well for adoption. The second part relates to scale. Given some of the challenges in the space, it's difficult for a company to be a single product anti-infectious company because the cost platform is just so sizable relative to at least the initial revenue. And so our solution to that is to bring scale. Right now, we have a commercial platform in this space, which has 2 products. And with the XACDURO approval, which is our sort of [indiscernible] and a very exciting asset, we are likely to have our 3 products in the market by the end of the year. And also which is similar to scale, but somewhat different, a lot of the companies have tried to transition from an R&D organization to a commercial organization. And that can be a challenge from the capabilities perspective. Through some of the acquisitions that we have made, we are -- we already have had a commercial footprint, and we're able to leverage this footprint to commercialize our new launch. So I think that we've been thoughtful about the pitfalls that some of the other companies have fallen in that and have devised ways and strategies to address those that would maximize our ability to succeed in the space and get the profitability.

Okay. You've outlined finding a path and something that I don't want to underestimate here for investors who are going to listen or pay attention to the transcript, is that stewardship dynamic, which is particularly kind of meddlesome and essential in the infectious disease space, particularly for serious infections in the hospital where essentially your decision-makers is incentivized to really limit the utilization of your powerful product, et cetera. So that's always kind of a dilemma here. So intended as a segue, and hopefully, I haven't stolen too much of your thunder, but Roger, why don't you take it from here and go through some of the assets and think about the Innoviva company to come in terms of the assets that they have.

Sure, sure. Thank you. So you mentioned XACDURO, your drug to treat hospital-acquired Acinetobacter infection that was recently approved by the FDA. It'd be really helpful if you introduce that product for us. And then maybe touch a little bit on, segueing from your comment earlier, why is it important that it's a broad spectrum versus targeted antibiotic?

Sure. That's an excellent question and I'm certainly happy to talk about it. So we first -- so XACDURO is an asset which we acquired from Entasis and we were first introduced -- we first were introduced to Entasis and invested into the company a couple of years ago. And then following successful Phase III clinical trial readout for XACDURO, we actually acquired Entasis. And I think what's really interesting about XACDURO is that it's the first pathogen-specific antibiotic approved by the FDA following an unanimous advisory committee vote. And what I think the -- what I think differentiates XACDURO is a couple of different things. One, it's a pathogen-specific antibiotic and unlike some of the broader spectrum antibiotics which face all of these stewardship concerns, et cetera, I think that physicians and hospitals would find it much easier to prescribe XACDURO because it's a product that was specifically made for Acinetobacter. And as a result, I think using it with appropriate patient populations can actually help address resistance concerns as opposed to multiply resistant concerns. And secondly, and this speaks to the differentiation of the assets, they're really -- we're talking about a space where really there are -- there was very high mortality and overall health burden and where there are not enough treatment options. And as a result, the cheap generics are not really as much of a concern as there could be for some of the other new launches in the space.

Okay. Got it. And I guess just to kind of touch on that point then, there's some language in the label regarding the use of maybe you have to use a certain generic before you ultimately prescribe XACDURO. Could you kind of talk about that and where you think it will be used in the treatment paradigm? Would it be first-line? Or how would physicians go about prescribing XACDURO to patients?

Yes. That's a good question. And XACDURO just got approved about 2 weeks ago, which we are very pleased with. And we are happy with the final label. XACDURO was approved for all susceptible strains of Acinetobacter for certain patient populations, which means that physicians have significant flexibility in terms of how to prescribe it and might not necessarily be beholden to multidrug-resistant or carbapenem-resistant patients. To me, that's very important differentiated, and I'm sure that physicians will be able to prescribe it appropriately. Another interesting thing, and I think about the label is that there is no background therapy that's been mandated. And we think that, that would also enhance physician's optionality in how they could use XACDURO. We think this is going to be a very important tool with significant flexibility for physicians.

Got it. So how are some of those -- maybe those conversations progressing? I imagine with approval in hand, you're [ out in the forest ] and you're talking to doctors about this. What is the messaging that you are presenting to them such that they would use XACDURO before some generic antibiotic?

So from my perspective, there really is not a whole lot that could be easily used. And this once again speaks to the differentiation of XACDURO. So far, the response from the medical community has been very positive. There is a lot of enthusiasm for the product because people understand that it really addresses a very significant unmet medical need. And I think that the unanimous 12-0 advisory committee vote speaks to that. The medical community understands that this is an extremely important tool that can be added in their quest to save patient lives.

Got it. Got it. So just a little bit on some of the -- so you mentioned the FDA unanimous -- advisory committee vote. There was really some discussion around where the data could be improved. So in other words, what kind of post-marketing studies you would want to see. Could you talk a little bit about those? I think in the latest FDA guidelines, there is some discussion around the 7 post-marketing studies that they need -- ultimately, Innoviva would have to perform. Can you talk about those? And in your view, do you find them challenging? Will they be expensive? Or are they overall very complementary to the launch of XACDURO?

Yes. So I think that post-marketing requirements are fairly typical for newly approved FDA products. There -- I don't think if there's anything particularly unique about the post-marketing requirements associated with XACDURO. They are generally in line with our expectations, and we don't view them as being particularly onerous and burdensome. So we -- yes. It's all good.

Okay. That's good to hear. So I guess a little bit on pricing, which I'm sure everyone wants to know a little bit more about. But before that, maybe you could talk about the CMS' new technology add-on payment. I think this is very interesting for the antibiotic space. Maybe it's a potential path to realizing greater returns in an area that has traditionally seen lower ROI. So maybe could you overview the NTAP program? Any notable recent developments you've seen and how that's applicable to XACDURO?

Sure. So as I think many of the people here know, reimbursement in hospital is driven by so-called DRGs, which effectively provide a certain level of funding for a given condition. And as a result -- and this has the potential to exacerbate some of the pricing pressures for new therapies within the hospital. And so NTAP is a program which is called to address that and facilitate the use of new technologies. And effectively, it provides -- or therapies. And effectively, it provides for additional payment on top of DRG for using sort of novel therapies. And we think that this could be an important component of encouraging adoption of XACDURO in the hospital setting as physicians sort of get more comfortable with the product. And then to address the first part of the question about the pricing, so we haven't really disclosed price. We're planning on launching XACDURO in the fall, and we are going to announce our price shortly before the launch. But one thing I would say is that we aim to price all of our products appropriately corresponding to the value that they're delivering to patients and other stakeholders. And we're also going to be responsible with XACDURO as well.

Okay. So just a little bit more on the pricing and the launch. So what kind of sales force do you anticipate putting behind XACDURO as you look forward to launch? And you mentioned fall. Do you have any more like specific time lines? Are we anticipating more like end of Q3 towards when you would see XACDURO on the market? And then also, it would be great to kind of hear about some of the conversations you've been having with payers and other constituents in the overall paradigm?

Sure. Those are excellent questions. So we currently have a commercial force of, say, 30 to 40 FTEs. And we think that -- and this comes primarily from the legacy La Jolla operations. And in general, we think that given the very significant sort of footprint synergies between Giapreza and Xerava, our 2 multi-products, and XACDURO [ fulfilling ] the potential new launch, we think that the increase in the commercial footprint is going to be relatively limited. And yes, I think that the conversations we've been having with the hospitals so far have been very supportive. And as I mentioned, I think the people do realize that this is a new and very important treatment.

Okay. Got it. I think just one last question on XACDURO from me. So if you look at the epidemiology of ADC infection, it's a lot more prevalent outside the United States. So any thoughts around partnering this asset with different [indiscernible] abroad? Or have you already been in conversations? Any kind of color would be very interesting, just noting the significant potential market opportunity outside the U.S.

Yes. That's a great question. And Acinetobacter is even more [indiscernible] outside of the United States relative to the U.S. We are already partnered in China with a company called Zai, which is taking the product to market there. In general, it's -- we think that we have a great product, and it's important for us that we make it accessible to patients, and therefore, save some lives. So we've been engaged in dialogue with certain counterparties outside of the United States.

Okay. Can you remind us where are they in the regulatory process for bringing XACDURO to China?

They submitted their NDA to the Chinese regulator and are awaiting results.

Okay. Got it. So before I move on from -- before I cover other assets, happy to incorporate some other commentary. But let's talk a little bit more about your other pipeline asset that's currently in Phase III, zoliflodacin. Could you introduce that product for us? And then maybe talk about what indications are you addressing with this product and what the overall epidemiology looks like in the U.S.?

Sure. That's a great question. So zoliflodacin is the second asset that we got as a part of the Entasis acquisition. It's a gonorrhea asset. And one of -- gonorrhea is one of the kind of more prominent STDs in the United States and globally. About 1 million cases here. And currently, it's being treated by quite a good standard of care. The issue is that the standard of care is an injection, which is relatively painful. And also there is emerging resistance. Resistance is quite prevalent outside of the United States, and there were initial cases in the United States. Our candidate, zoliflodacin, is an oral, which would also address resistance concerns. So it can potentially be a very powerful addition in the fight against gonorrhea. And right now, it's in Phase III clinical trials, and we would expect -- those trials have been sponsored by our partner, GARDP, which is a nonprofit organization. And we would expect those trials to read out by the end of this year.

By the end of this year? Okay. Very interesting. So how is that Phase III designed? Can you maybe talk about how you're structuring it? Is it powered for superiority or noninferiority? And then overall, maybe what are some expectations you hope to accomplish with that study relative to standard of care, of course?

Yes. Well, so the study, it's a noninferiority study, enrolling about 600 patients, comparing zoliflodacin to the standard of care. And we think that if the study reads out successfully, we are going to have a powerful tool with significant administration benefits, oral versus painful injection, and also potential resistance benefits, which are going to become increasingly important over time, given that one would anticipate resistance to the standard of care to develop. So I think that this could become quite an attractive product over the coming years.

Okay. And how do you maybe internally, what are your expectations for commercial trajectory for this product? Do you anticipate rapid market share penetration? Or is it more of a kind of a slow progress?

That's a great question. I think that there are a couple of different scenarios, partially, they're going to be driven by resistance concerns. I think that one could expect meaningful uptake and then a lot of these STDs are driven by guidelines. And so a potential change in guidelines could actually drive a stepwise change in adoption of this product. But obviously, we need to see the data kind of before we finalize that commercial projections. But in general, we're quite excited about the product.

Okay. Okay. So let's turn to your other commercial products, Giapreza and Xerava. Maybe for the audience, you could briefly introduce these 2 products and then I have some follow-up on that after?

Sure. Absolutely. So Giapreza and Xerava were the 2 products that we received -- that we acquired as a part of our La Jolla acquisition. Both of them have been on the market for a few years. And they are -- Giapreza is a septic shock product and Xerava is a complicated intra-abdominal infection product. Both are very interesting products that are used in hospitals. We think that there is significant opportunity to re-energize their sales, partially driven by the fact that we believe -- well, they were launched during the COVID -- or right before the COVID times. And so COVID has impacted some of the sales dynamics there. And secondly, we believe that with better resourcing, we can actually achieve meaningful improvement out of the revenue trajectory. And we already identified some of the low-hanging fruit and are working on some of the kind of -- on some of the other potential opportunities for improvement. And I think we're starting to see results. So Q1 was kind of -- last Q1 was the best Q1 in the history of the franchise.

Okay. Yes. That's right. And so just on the commercialization front. So you noted that you anticipate using the 30 to 40 sales force that you already have today to supplement the sales of XACDURO. But as you look to further build out sales of Giapreza and Xerava, how do you think about the sales force going forward? Will you look to increase the capacity over the near term? Or is that more of a long-term view before you want to add more reps?

Well, I mean -- so we're going to drive -- I mean we think that the existing sales force potential with certain limited expansion should be sufficient to support the existing products as well as the XACDURO launch. And then, of course, over time, kind of we can refine our strategy as appropriate.

Okay. Got it. So just being mindful of time here, just jumping through some other topics. So maybe you can talk about some of your other earlier stage assets in your pipeline and you can introduce where that is right now and potential indications that you're looking to explore these?

So we've been kind of thoughtful about where we commit our capital. I think right now, most of our R&D resources are focused on zoliflodacin as well as supporting some of the post-marketing and other requirements for the market products. And we're making targeted investments in certain early-stage assets. But I think that Giapreza, Xerava and XACDURO and zoliflodacin are going to be key value drivers for our hospital and infectious disease business.

Okay. And so just to segue into that. So your business model incorporates a lot of minority investments. Maybe you could talk a little bit about that. Maybe some of the investments you've done in the past. And I guess what's the overall strategy with these minority investments? Is that like a target that you're looking to maybe acquire 1 day? Or ultimately, how do you think about those investments you've made?

Yes. So the minority investments were made in conjunction with a legacy asset related -- which was housing TRELEGY royalties. TRELEGY was one of the other products, which we developed and then partnered with GSK. We -- last year, we divested this asset at 17x revenue, which we thought was a very economically advantageous deal. And as a part of the transaction, we received the rights for these assets. We think that as a group, these assets, they are fairly diverse. For instance, there is a depression asset there. There is a microscope asset there and a couple of other things. We expect that these assets as a group are going to perform well because they have high revenue potential and value creation potential.

Okay. So let's just squeeze 1 last question in, and it's on the topic of the respiratory product that you just mentioned. So that's primarily where Innoviva derives most of its revenues today. Do you consider yourself -- going forward, your company to pursue more of these royalty acquisitions? Or is the focus now more on just focusing on commercial operations and maybe even transitioning to a commercial stage biopharmaceutical company?

So I think that -- I don't think that we're going to sell and to hold onto the royalty structure. I think that if we'd like to get an exposure to a particular asset, we'll figure out what's most appropriate. Royalty can be one way, but it doesn't have to be the way. And I would like to say that we have a couple of different -- I think that we have a very balanced, well-diversified business across 3 major value streams. One is the historical royalty assets, which are very well diversified. The second one is the -- our critical care and infectious disease business that we've discussed the plan, which we think can also be very valuable given the good growth profile, operating leverage and results in path to profitability. And the third one is some of these other assets, which also can be meaningful sources of value.

Okay. Great. Well, thank you so much, Pavel. And...

Terrific. So we're glad we can get this overview, Pavel. Thank you for joining us this year, and really appreciate your thoughtful responses. And nice work from my associate, Roger Xu, who's a natural at doing this between 2 [ friends ].

Great. Thank you very much. It's my pleasure.

Thank you.