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

Okay. Thank you very much. Let's kick off our next session with Innoviva. My name is Chris Shibutani, I'm a member of the Goldman Sachs Equity Research Team. Very pleased to have our CEO from Innoviva, Pavel Raifeld, to join us this year. Well, thanks for coming.

Chris. Thank you very much. It's really a pleasure.

Let's start off by making sure that we level set and just give us a little sense about Innoviva because you guys are kind of unique entity. So maybe just a little -- encapsulate for us who the company is and tell us a little bit also about yourself as the CEO and your journey from -- coming from where you've been and the experiences you bring to bear.

Sure. Very, very happy to talk about Innoviva and myself as well. So Innoviva -- so we started out as a royalty management company. And over the past several years, I think, we have made a major move that we're actually having a very sort of robust operating platform in the critical care and infectious disease space. So right now, we effectively have 3 major businesses. One is the -- is our royalty business, which is delivering us over $200 million of revenue a year of BREO and ANORO, which are 2 of the most popular respiratory products commercialized by GSK. And these have been very durable and resilient. And then over the past several years, we have been deploying some of the -- some of the capital inflows from those products into making investments. And we have built a very, as I mentioned, robust and I believe, valuable platform in the hospital space with 3 market products and another pipeline asset. And then we also have a number of strategic assets, which are currently valued at over $600 million. And so all in, I think, it's a very exciting, it's an attractive business at an inflection point in its development. And as far as my personal background goes, I have been leading Innoviva for the past 4 years or so. And previously, I worked at an investment fund. And before that, I was an investment banker and also management consultant across a number of blue chip firms in the space.

Yes. No, that's very helpful. And I think your experience is very relevant because it's the unusual combination of these components of the business. When we speak with investors, people are trying to find comparable companies, and there's always some element that has some semblance, but it's distinct. Let's start with the top line. So essentially de facto, your revenues, your source of funds, the oxygen that feeds the rest of the enterprise really comes from GSK. And there was a restructuring of the way the royalties work going across that portfolio. Just explain for us and give us a sense for what's the right range in terms of what the number is going to be going out for the next several years, just as a starting point in the way that a top line number would do for us.

Sure. So initial -- well, so a few years ago, we were receiving royalties from 3 GSK products. TRELEGY and then ANORO and BREO. And a couple of years ago, we actually monetized our portion of the TRELEGY royalties and I think this is actually -- I think this was a very economically accretive transaction for us. And also kind of a testament to our willingness to and desire to make value-maximizing decisions on behalf of the company and for the benefit of our shareholders. And so right now, we are kind of in a way receiving royalties from BREO and ANORO. Collectively last year these products delivered over $2 billion of revenue on a global basis. We're getting royalties on all of that. And I think the exciting part about BREO and ANORO is these products are extremely well regarded. They're very well known, and they are very -- to use a word sticker for lack of a better word. And even in environment as disruptive as COVID, these royalties have delivered. And in fact, I think that they have been outperforming our expectations for the past several years, and we anticipate that the same would happen on a going-forward basis. So I would anticipate them to be sort of a very stable royalty stream, and we also believe these royalties to be quite durable.

Yes, I think that's often the case. We see that drug device combination therapeutics are probably thought as being more vulnerable than they actually truly are, especially when they become standard of care as those 2 products have been. That you don't see the level of attrition or erosion, but there's quite good adherence, chronic disease and that the brands hold up quite well. So then the restructuring decision to monetizing that 1 product's royalty was, in essence, a strategic decision at that juncture. Whereby you sort of felt you needed to enhance essentially your access to capital to which then you are going to then implement further along this strategy, which when I think about what you guys have been up to lately has to really become more of a commercial biotech organization, right? Is that a fair way to frame sort of that juncture in that decision then?

Yes. That's a very fair way to frame that. And it was a bit of a strategic decision. But equally, it was also an economic decision because I think that economically, it was a very advantageous decision for us. And so that was the right thing to do.

Okay. Got it. Let's talk about on becoming a company that sells stuff. It's a very different business. You are a consultant, you're an investment banker, and so understanding sort of kind of the mapping of these businesses, you become kind of a commercial enterprise. And these products, which we'll talk about a little bit basically became visible or an important part of Innoviva's P&L, so to speak, as relatively late-stage development products. So we think of you as a commercial stage, small biotech company that sells products and has things in development. It would be fair to say that when you're thinking about your pipeline and this portfolio of commercializing products, they come from an acumen that you have at the business development level, right, not necessarily at the drug discovery, R&D. You don't have people running around in goggles and specs. It's more sort of strategic gathering of assets that starts with often minority investments that you have. Is that the right genesis of thinking how did that first quarter print come about? We're talking about these products, but remind me where they came from. So strategically, is it fair to say that these companies and these products are part of a portfolio. You've been doing different things to migrate them further into the Innoviva umbrella. Is that the right way to frame it?

Absolutely. And I think that's a good way of framing that, although a good start with our investments and M&A actually gave us a very strong operating footprint with expertise across regulatory, medical, commercial and other areas. But to get back to the genesis of it all, I think, initially it started with the idea that infectious disease and hospital space kind of more broadly, has very significant unmet medical need. Yet, at the same time, it was unloved by investors for a variety of reasons. And we felt that a player with thoughtful -- with ability to thoughtfully select assets with long-term vision, focus on costs and ability to create scale could actually do very well in the space. And in some ways, it was a part of a roll-up strategy. And so initially, we made an investment in the Entasis Therapeutics, which at the time had 2 Phase III assets. As a preview, 1 of the assets called XACDURO was recently approved and launched and another 1 had positive Phase III data, and we expected that to -- it's well on its way to be filed with FDA. And so when we got positive data for the first asset XACDURO in Phase III or rather Entasis got, we thought that this will be a good opportunity for us to acquire all of the company. Because it had a very attractive differentiated asset. And I do think that the asset is quite different from a number of other antibiotics. I'm happy to go into more detail on that. But secondly and importantly, we -- this was a very strong R&D platform with competencies in medical and regulatory and CMC and other areas. And so then as we thought as to what would be the best way to commercialize this, we encountered a company called La Jolla products in the hospital, one in the infectious disease space, another 1 in critical [indiscernible] commercialization platform. And so we thought that with these 2 companies, we would have a fully integrated asset in the hospital space with a focus on infectious disease and critical care where we could really drive value. And so we spent the past year integrating these 2 companies. And I'm very pleased that -- to say that I think right now, we have a very robust and strong platform that has been delivering across all areas. We managed to utilize commercial performance of the legacy La Jolla assets. We were able to get approved and launched XACDURO. And while it's still early, the launch is going quite well and we managed to -- and we also managed to advance Zoliflodacin, which was all our Phase III asset. So all in, I think, we have an excellent platform and a lot of it comes down to the team. And we do have a team which is very strong and which has a lot of really differentiated expertise across all the areas of the business, which are required to make this work.

Well, the antibiotic industry for well over a decade, the unmet need and the magnitude of it from the standpoint of humanity, seems unquestioned, and you often hear about how bacteria don't really care about and respect our current antibiotics and drug resistance is a clearly mounting problem. I think the Burroughs Wellcome Trust talks about how somebody dies in the world every 5 minutes from an infection that there is no treatment that's available. So that seems to be the case. Conversely, you look at the pharmaceutical industry going back a couple of decades. And the business of discovering, developing, commercializing antibiotics has been really rough. To the point that there have been small companies that have literally gone bankrupt. I covered 1 previously. And there's also been large pharma companies that have kind of voted with their feet and voted with their investment. You see sort of the hospital chain as being kind of complex. The antibiotics as being ones where stewardship seems to work against the notion of volumes because markets are adding times price, et cetera, and then it's really hard to price for these things as XACDURO. So it's been 100% appreciate sort of like the magnitude of the unmet need here. And [indiscernible] to either try and fail or -- how is it that you guys are believers and what do you think is going to be really the way to measure. It's like, yes, these guys actually have found a path to demonstrate a sustainable and growth business in this area. It's really why you guys question.

That's an excellent question. And we always try to [indiscernible] in order to make sure that we operate as effective as we can. So I think, one of the issues in the space has been for some of the other companies. That they were trying to sell meat -- they were running trials that would effectively produce meat to assets from the product profile perspective. And against the backdrop of some pricing pressures and also stewardship concerns. It turned out to be sort of more challenging than anticipated for them to try to generate revenue with these assets. And in the meantime, they built out fully fledged cost platforms, which kind of -- which made them sort of a very cash flow negative and made those businesses difficult to operate. And they might also have been some capability mismatch. I think we are different because we are almost -- well, not almost, but we took an investor's viewpoint of this, and we took a long-term perspective. The 1 we identified differentiated assets. And by the way, we're not just present in the infectious disease space, for instance, Giapreza, which is sort of the biggest revenue contributor right now across our own market portfolio, it's a critical care asset. So we identified differentiated assets in the hospital. And XACDURO is differentiated, for instance, in that it's the only -- it's the only asset. It's addressing a very significant unmet medical need and it's really the only asset indicated for this specific indication. And we thought that with this differentiation and with the thoughtful asset selection that would allow us to effectively bypass some of the stewardship constraints, we would be able to generate revenues. We put the assets together in a way that generated scale, and we have laser focus on efficiency and we really watch our costs very closely. I think so far, the business has evolved in line with our expectations, perhaps above our expectations. And we think that it's a very valuable business, which is going to become sort of cash flow generating soon.

So you talk about getting to scale. You have 3 commercial products, 2 are antibiotics. There are several in the pipeline. What -- give us some perspective in terms of what would actually be your aspiration in terms of the level of scale? Do you need to half a dozen products? Do you need a dozen products? What is your ambition as figuring out what the business plan is going to be on an intermediate to longer-term basis? We expect you to do more acquisitions and et cetera that can put more antibiotics in the bag or hospital products in the bag?

Yes. So I think that the product -- I think that our portfolio is well -- even agnostic sort of any strategic moves, is well on its way to be a cash generator for us. Having said that, we also have a platform which we believe kind of is ready to accept addition products. And there are multiple products and assets out there available at attractive prices. And right now, the platform is at the point where it's ready for that. So I think that we -- our plan is to continue delivering on the business, making sure that we grow our assets commercially. And by the way, just to give you an example, our Q1 revenues from our own portfolio were 66% higher than for Q1 last year. This is the amount of sort of growth that we're talking about here.

Okay. Let's talk about some of the products specifically then. So we started by talking about XACDURO, which came from the Entasis acquisition here, antibiotic. Talk about the key growth drivers here? Is it a backdrop of utilization for a particular type of infection or an indication? Is it a matter of your commercial push? What's going to drive the growth here?

It's both of those. It's push and pull. XACDURO is an antibiotic, which is targeting bacteria Acinetobacter that really has very few -- there really are very few available treatment options. And especially for the Carbapenem-resistant Acinetobacter. And so while physicians might have tried a variety of things, I think that XACDURO is differentiated. That we have kind of very good data with efficacy and safety, relative to a lot of -- relative to other things that have been used in this space. And when we talk to physicians and KOLs, they really appreciate kind of how differentiated our product is. And secondly -- and by the way, because it's been used for a very specific patient type, I think, we...

Can you specify what that is for the purposes of this webcast here, with Gram-negatives and inpatient, outpatient, narrow down exactly what the target is?

Sure. So it's indicated for susceptible Acinetobacter. But we think that a lot of the use is going to be in carbapenem-resistant Acinetobacter and the focus is on HAP and VAP infections. So hospital-acquired pneumonia and ventilator-associated pneumonia.

Okay. So very significant infectious disease, hospitalized patients.

Hospitalized patients, very significant mortality, very significant unmet medical need. And I think that our clinical trial shows kind of how strong the efficacy is for the product. And there are also certain safety and tolerability advantages embedded as well. And so we're getting a lot of positive receptivity from practitioners, from physicians in the space. And we also -- at the same time, we also have a very compact but very experienced sales force and also market access people who can actually go and -- go and commercialize the product. We launched it in September of last year. So these are kind of still relatively early days, but all indications are highly supportive of this becoming a very important product in the space and really not just an important product in the space, but also a very meaningful revenue generator for us.

Put a little bit more in the way of metrics around that. So tell me about the number of sales people that you have. Are you at full capacity? Do you have ambitions to grow that? And then talk about the number of target accounts, which I assume are sort of major medical centers, but there's obviously a huge community presence. What is your penetration into that? We're not even a full year in, but every time we sit down, I'm going to be looking to sort of see how your commercialization effort is progressing. So create some milestones with some numbers here, salespeople and target accounts and penetration.

Yes, so we have approximately 30 salespeople. And here, I -- and then we have additional market access people who are focused on account level access. And of course, MSLs are also -- the medical affairs personnel are also an important part of the strategy because this is a high science product. I don't think that we have disclosed our -- kind of our target numbers of hospitals, but in general, we are present in well over 1,000 hospitals. And I think it's also very important to note that the target sort of call points for XACDURO are actually very similar to the targets for our 2 other products, Xerava and Giapreza, which I think creates a great synergistic effect across our portfolio.

So this would be the exact same target where you're talking about the in-institution or inpatient P&T committees, pharmacy and therapeutics committees who are trying to essentially acknowledge which products they want to have in their in-hospital formulary. Is that a fair way of framing it? So when you're talking about who the exact same target, I mean, if you have a patient who has need for XACDURO, it's an infectious disease specialist probably right, whereas for Giapreza has a different indication. And so when you're saying about that's the same target is how are you leveraging and who is that specific...

Yes, but also, there is some presence in the ICU. So I think that there are multiple similarities in terms of the types of physicians that we're targeting. And then, of course, kind of the P&T committee, pharmacists, hospital levels and there are also multiple similarities as well. I think that this creates very positive tailwinds across our portfolio, but specifically for XACDURO. And we have been seeing a very -- we have been impressed with the receptivity of XACDURO across the hospitals in the U.S.

Remind me, the IP for XACDURO in the U.S. goes out until roughly when, what's the durability of that asset?

It goes out into the second half of the [ '23 ] .

Okay. international expansion opportunities, I think we have some regulatory rites of passage that have to happen. And then there's also some collaborators on a strategic level, Zai Lab, if I'm not incorrect. Just remind us where we are about getting this product to market outside the U.S.

Sure. That's a great question. And this is actually very timely because just a couple of weeks ago, we and our partner, Zai Lab, announced XACDURO approval in China, which is a very big milestone for us. Acinetobacter and especially carbapenem-resistant Acinetobacter is arguably a larger issue globally than it is in the U.S. And so as such, the market opportunity there is very sizable. So for instance, Zai Lab has publicly stated that they anticipate sales of XACDURO in their territories to be over $0.5 billion, just to give you a sense of what the opportunity is like. We have been in conversations with our multiple potential partners in other parts of the world. Obviously, we'd like to make the product available to patients who need them in markets outside of the United States and those have been sort of very fruitful.

Remind us the economics of the relationship. So antibiotics, we tend to think of only Cubicin as being the sole blockbuster in the U.S. going quite a ways back. So over $0.5 billion potential, $500 million-plus, certainly seems conceivable in these large end markets. What does Innoviva actually see on your financials? Do you have like a royalty structure? Just remind us how that -- the numbers hit the P&L.

Yes, exactly. So we -- so we -- I mean, so we're getting some milestone payments associated with regulatory and sales milestones. And then we're also going to get royalties from the sales. We -- I don't believe we have publicly disclosed them, but they're generally consistent with numbers for other such arrangements.

Moving on to, I think, a pipeline asset, Zoliflodacin is that legacy Entasis, right? Okay. So here we are in the stage where we're kind of going to regulatory processes, right? Remind us the indication and the data that you've demonstrated here, so we can think about odds of eventually getting to commercialization.

Sure. So the indication is for gonorrhea and we think that this is a very interesting product for 2 reasons. The first one is that unlike the current standard of care, which is an intramuscular injection, this is actually a product that can be taken orally, which has very meaningful convenience benefits. And secondly, and quite importantly, kind of a lot of products in this space historically have faced resistance. And if -- and we have already seen some of that with the standard of care, ceftriaxone, in markets outside of the U.S. And so once that happens -- when that happens in the United States, we think that we are going to have a product that's going to be very differentiated. But this could be a huge opportunity.

So this -- you also have a partner, right? So who's doing what, who's in charge of the NDA filing and what's going to happen when?

Sure. So we have a partner GARDP, which is an NGO, and they have been responsible for running the clinical trial and we are responsible for the NDA. We're expecting to file the NDA with the FDA in early 2025. And so far, we're not anticipating any challenges. It's -- we expect it to be a fairly smooth process. In terms of the economics, GARDP is responsible for -- GARDP has rights to a number of low to middle-income markets. And we have rights to a number of high-income markets, such as the U.S., Europe, et cetera.

What is the fair range to think about peak revenue potential again for Innoviva. What -- should we think of this as a $100 million, $150 million, $250 million product for Innoviva's income statement or scale this for us potentially from a theoretical standpoint.

I mean this could be very sizable. This could be $0.5 billion product in the U.S.

In the U.S.? And what would it -- because of your partnership, how would that hit your P&L though? Are we talking again...

It would hit our P&L directly...

As revenues...

As revenues direct with us, yes.

Okay.

And by the way, just one thing to note, gonorrhea is a problem, I mean across the world. In the U.S., there's approximately 1 million cases sort of noted, although there is very likely some underdiagnosing. In the world, you have over 80, 8-0, million cases. This is just a huge opportunity.

Let's hit up our third antibiotic, the second one that you commercialize Xerava broad spectrum, complicated intra-abdominal infections. How is that commercialization going? And what can we think about, again, this question of putting these products within the umbrella of Innoviva as opposed to where they were previously housing independent products. What is the factor that could drive some upside. So if you can tell us a little bit about Xerava and what the outlook is?

Sure. That's a great question. And I think Xerava is a good example of our thesis that when you add scale and appropriately resource the platform, kind of revenues follow fairly quickly. So Xerava is a complicated intra-abdominal infection product. I think that there are multiple growth drivers sort of at play here. The first 1 is over the course of the past year, we sort of resourced better, some of our market access capabilities. We built out our market access capabilities. And we also refreshed some of the sales and marketing sort of thinking and materials, which has already kind of shown strong results so far this year and which we anticipate to be a meaningful growth driver on a going-forward basis. In addition, we think that because XACDURO is such an exciting sort of product for us to discuss with infectious disease physicians. It actually has synergies with the Xerava call point. And as such, we also anticipate the combination of these 2 products to kind of -- to really propel revenues. So far, in Q1, we had good Q1 -- a very good Q1 for Xerava and we expect that to continue.

Giapreza is a different category of product. It's used to treat septic shock. Talk about where that product is in terms of its journey. It's the largest contributor of revenues, as you mentioned. Give us a sense for what you think the next several quarters could be like? And what level of peak sales we could be thinking about and when?

Sure, Giapreza is a great product. It's very effective. And we have been doing sort of a number of things to try to drive its revenues. Some of it is what I already discussed. Have better market access capabilities. We have been doing sort of better resourcing on sales and marketing front, better thinking as well. And on top of that, we have also been involved in sort of data generation. And we are actually including some really interesting data right now that we believe might also help physicians make the right decision, kind of to give Giapreza to certain patient types. All in, we have very high expectations for this product. And by the way, it's also, I think, quite important to say that the legacy La Jolla products, Giapreza and XERAVA were launched right before COVID times with a very lean, perhaps too lean commercial platform. And so as a result, they were not fully resourced while they were trying to fight very meaningful market access channel and just in the hospital channel during COVID. And so I think that we have been able to resolve a lot of these issues and really let the products shine.

So you talk about really inadequately resourced or under resourced efforts here, and you're pulling these together, which then takes me to just think about really the core of this business, which is capital allocation and your priorities here. So a lot of options, obviously, investing in the commercialization efforts, investing further in development, doing more business development. You guys have actually recently done some share repurchases as well. Outline for me what the priorities are for capital allocation.

That's a great question. Our capital allocation is what I spend a lot of time thinking about and the rest of the team as well. We -- so we try to be thoughtful, at the same time opportunistic. We think that with our operating platform, IST, we have multiple opportunities to deploy capital, and we sort of -- and we evaluate those opportunities as they become available. Equally, we are also open to potentially review opportunities kind of in other areas and capital return to shareholders is something we have done a fair amount of. As you noted, we just kind of -- we just completed our $100 million share repurchase program. I would also like to remind that a couple of years ago, we actually retired 1/3 of our shares that were owned by GSK in a transaction that I believe was very strategic and economical, accretive to Innoviva.

So that was a bit a review of historically. And if I'm listening to your response with my question was about priorities, you replied with the history of what you've done, you started with the business development, you talked about going beyond into other therapeutic areas. On the forward, if we were to think about the next 2 to 3 years, are those the priorities, business development, expanding the portfolio is number one?

Yes. Well, so it -- M&A is difficult -- M&A is difficult to predict and that you need to have appropriate assets available at the right price, right? Business development is a priority for us. Capital return to shareholders is something that we're also contemplating.

Okay. And then if I think about the total spectrum. We know that we have these royalty streams from the GSK products coming through. They're more durable than people probably could believe. But nonetheless, there is a natural history of these products and, therefore, natural history that I think is forecast. Street could be wrong, we could be wrong. But then ultimately, you're trying to put this commercial organization, and there's going to be some point in which you're going to crisscross and become a profitable self-sustaining enterprise based upon the top line, theoretically not dependent upon this royalty stream. When do you think those lines cross, so that we think of Innoviva as, oh, this is a company that sells antibiotics and hospital products. Not that they have some sort of cash stream piggy bank that's coming from GSK. By then, that somewhat pejorative phase will hopefully apply. But when are we talking, is this 2026, 2028, 2030, when does that happen? I would imagine it has to happen before the investors will start to get worried about material declines in the prospective revenue stream coming and they'll be pressuring you to be an effective commercial business. So how can you reassure people that you can get there? And what's the current goal?

Sure. So let me try to -- let me try to address it in 2 different ways. The first 1 is that we actually anticipate royalty streams to continue being sort of resilient and continue generating a lot of value for us for years and years into the future. Secondly, I think that the operating platform is actually going to become profitable in relatively short order.

In relatively short order, folks.

Yes, and given the significant operating leverage embedded there, our revenues are growing very quickly. The cost of the platform is relatively stable and perhaps even with some potential decline given that right now, we're working through a number of sort of onetime cost effectively. So this is a platform that's well post value creation. And if 1 were to add other products on top of it to accelerate revenue delivery, that's -- this could become even more of a cash machine. And I would also like to note 1 thing that as we think about capital allocation priorities, we really try to look at all aspects of our business, making sure in a very focused way that will maximize value for our shareholders.

All makes sense. We will certainly wish you well as we continue to need antibiotics and hospital-based products and to have the courage of your convictions when a lot of other folks have tried valiantly not necessarily succeeded, and larger companies are sort of paying attention, less so to some of these areas. So for humanity's sake, we wish you well. Pavel, thank you for joining me.

Yes. Thank you very much, Chris. Really appreciate it. Thanks.