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

Good morning, everyone. Thank you for joining us the next session of the Barclays Healthcare Conference. So I'm delighted to have Pavel Raifeld, the CEO of Innoviva, with us. Pavel, it's great to have you. Thanks for joining us. And maybe to kick-start the proceedings, could you maybe start with some opening remarks around the business and the outlook as you see? And we could dig into some of the questions.

Of course, thank you very much. And it's really a pleasure to be here. So Innoviva is a very interesting company, which I'm very proud of. And we started as a -- and we were initially formed to manage royalty revenues for some products that we developed with and in-licensed to GSK. And as these products have become very sizable from the revenue perspective, we started receiving very sizable royalties, and have become a very profitable company. And so then a very significant question for us was, how can we accretively deploy the capital available to us to create value for shareholders? And so we started to make very meaningful investments in areas of high unmet medical need that we thought would actually be very value-accretive in the long run. And perhaps the biggest of these investments is a platform in the infectious disease and critical care therapeutic space that I think has since become sort of one of the leading players in the space. And so right now, Innoviva is composed of effectively 3 different businesses. The first one is still our royalty business. And we're getting -- and it's -- this business, last year, we received just over $0.25 billion in royalty revenues, and consensus estimates forecast about over $1 billion of royalty revenues to us over the course of the next 5 years. So it's a very valuable and important part of our business. The second part is this infectious disease and [ hospital ] therapeutics platform that last year delivered over $100 million of revenue, essentially doubling from the year before. And we have also been very proud in terms of how it expanded, and expect great things from it. And then last but not the least, we also have a portfolio of strategic healthcare assets which are effectively stakes in companies that have very significant promise, and I believe asymmetric risk-reward profile. And these have been valued at over $0.5 billion. So I think that the collection of these assets really creates multiple opportunities for us to create value while also offering a lot of downside protection. So very happy to elaborate on any of our businesses.

Yes, absolutely. Great. So for the sake of full disclosure, it's a company we do not cover. But the business model looks very interesting, pretty different from quite a few of the companies that we look at and cover.

So maybe starting with the royalties business. Clearly said that $250 billion, get towards -- or going towards $1 billion. Can you just discuss what drives this? And what are the underlying assets that drive this, and the expectations for this segment over the next 5 years?

Sure. Yes. So we're getting royalties off 2 of the most commonly used asthma and COPD assets commercialized by our partner, GSK. They are called Breo, or Relvar ex-U.S., and then also Anoro. And these are extremely well-known, well-characterized assets. And if you know any people suffering from those 2 respiratory conditions, chances are they or some of their friends are using those drugs. These drugs have been known for a long time, and both patients and physicians like them. And there is very significant stickiness embedded in this service. And also these are maintenance therapies which effectively means that people are less likely to switch them even if there are huge generic entrants or perhaps some new treatment. Secondly, the bulk of revenues for this product is coming from ex-U.S. markets where you still have very significant growth. And there are meaningful pockets of growth in some of those markets. And so we're quite excited about the resilience of these products in environments as disruptive as, let's say, the pandemic, more recently. And then last but not the least, both of these products enjoy very meaningful IP protection, which can extend into 2030 and beyond. And on top of that, this is a space where, historically, generics have found it very difficult to enter even after a lot of the IP was gone. And so we're quite comfortable with the competitive moat around our products. And we think that some of the consensus estimates might actually not do full justice to the resilience and durability of these products.

Understood. I mean for what it's worth, I remember speaking to a very well-known respiratory company in India in 2007, who were planning to come out with a generic Symbicort in 2012, and they got it out maybe 13 years later or 12 years later. So I do hear you when you say that this is a very tough area for generic companies to launch products in.

Exactly. And the same happened to generic Advair. It's a recurring story because these are such complex drug device combinations, both from a manufacturing perspective and then from the regulatory perspective as well.

Okay. Maybe shifting to infectious diseases side. It looks like last year was a great year for the business. And any key highlights that you want to call out, and we could dig further into it?

Yes. So, and perhaps just to go back and sort of talk a little bit about why we decided to invest in this business. Historically, infectious disease space are -- well, not historical, but over the last few years, the space has been unlocked by some of the investors because there has been some value disruption in the space. And we thought that the challenges that some of the companies face in this space could actually be opportunities if applied correctly. And so -- and we have looked at how various companies have fared in the space. And we are -- and we thought that if you could focus on differentiated products, be almost hawkish from the fiscal discipline perspective, and make sure that you have scale, then you could actually build a sustainable, profitable business in the space. Effectively, doing a roll-up. And this is exactly what we have done with our business in the space, which we call Innoviva Specialty Therapeutics or IST. And IST has been performing very well over the last year. The launch of our most recent product called XACDURO has been one of the most successful over the last several years. We continue to reenergize other products in the space. And right now, we have 3 products in the market. And we manage to in-license another product with a near perfect fit for our portfolio. And then advance some of our pipeline. So all in, a very exciting year for us with a lot of activity. And we think that IST is really becoming into what we hoped and expected it to become.

Great. So very interesting. And so could you tell us about the new product that you in-licensed and brought on, and your expectations from it, more importantly?

Yes, of course. We're very excited about it. It's a product called ZEVTERA, which we in-licensed from a Swiss infectious disease specialist called Basilea. And we think that this product is -- it's a very differentiated product that we were very lucky to be able to in-license for a relatively modest capital outlay. And the product is very differentiated in a couple of different areas. We are most excited initially about its users in MRSA bacteremia where we think that it's -- it actually could be game changing. But then we also think that it's also indicated for pneumonia and skin infections. And we think that it could also be sort of a quite meaningful addition to physicians' arsenal in those spaces as well. So all in, we have high hopes. We expect to launch the product in the middle of this year. And so far, everything has been progressing in line with our expectations.

Got it. Do you want to put out any longer-term goals around this product and what one should expect? Or is it too early still?

It might be a little -- it might be a little too early to tell. One thing I would say is that some of the consensus estimates for Basilea were a couple of hundred million dollars. But I think that we would need significantly less than that to make it a very economically accretive product for us.

Got it. Understood. Maybe shifting onto -- on the product. So I know you have an NDA submission coming up for zoliflodacin. So give us an update around that. And how should we think about the outlook for that particular product?

Yes. So zoliflodacin is our lead pipeline asset. All the NDA preparation is progressing in line with schedule. We are -- we've been sort of very pleased with that process. And we hope that by this time next year, we're going to have an approved product with zoliflodacin. In terms of the opportunity, I think that there are 2 ways to look at that. As a reminder, zoliflodacin is an orally available product for gonorrhea, which is a very important disease with meaningful unmet medical need. So we think that sort of in the first phase, zoliflodacin's sort of oral delivery mechanism is actually going to be very differentiated compared to the current standard of care, which is a fairly painful injection. But then I think longer term, kind of once resistance to the standard of care arrives to the United States, there is a good chance that zoliflodacin could become the next standard of care. And we're very excited about the opportunity there.

Got it. And again, lastly, maybe just to sum up the overview of the business, as we think about this for 2025 and the next couple of years, so what are the top milestones that we should be looking forward to for the segments?

For IST, well, so I would anticipate continued commercial delivery from our market products, GIAPREZA and XERAVA, and then, of course, our new-launched XACDURO. I would hope for a successful launch of ZEVTERA, the in-licensed product that we just discussed. And I'm also hoping for positive regulatory developments with zoliflodacin.

Got it. And we look forward to that and wish you the best in those steps. Shifting finally to the final part of the business, a segment that you discussed around the strategic assets. So give us a bit more color around the nature of these portfolio of assets. And how should the stakeholders, including investors, be thinking about these particular assets? And what is most exciting about it?

Yes. So it's a very exciting portfolio of assets. And we selected them, effectively selecting assets with significant differentiation in areas of high unmet medical need. And we think that our assets in this portfolio hold significant promise, both from the product perspective and then ultimately from the commercial perspective. One asset that I would probably want to mention here is Gate. It's a depression asset that is supported by some of the leading work on synapse sort of biology that was led by a leading Nobel Prize winning researcher in the space. They're currently running a Phase II trial in depression. And I think, if successful, this could be a very meaningful inflection point for Gate, but then also for our strategic healthcare asset portfolio in particular. And we're quite -- we look forward to getting data.

Got it. Look forward to that. And I think one of the things about a diverse business setup like yours is also investors' ability and time spent on understanding the business segments and the dynamics of each of these. So when you speak to these, what are the key questions or pushbacks or concerns that you get around the overall business in terms of how you think the market has understood the business?

That's a great question. I mean we do have a generally diverse business, but I think that its diversity is actually its strength. And if you think about sort of the way our business is positioned, the royalty assets provide us with very significant cash flows and effectively shield us from a lot of the market volatility, which might be particularly relevant in times such as these. And they also provide us with an opportunity to really deploy capital with a long-term vision. We don't cut corners. We invest to build long-term value. And then I think that both across IST and the strategic healthcare asset portfolio, there are multiple milestones there which enable us to create value. And I agree that there are multiple -- that there are multiple sub-assets there, but in some ways I would view these as multiple option values or multiple opportunities to create value. And to me, a lot of what Innoviva is about is potential to really build something very meaningful. And I think we've been making major inroads over the course of the past year with doing that. And I think that this year has potential to be our best one to date.

Got it. And as I said, the royalty asset is kind of almost, I would call it, a cash flow shield for you. And as you think about this, with the strong cash position, so capital allocation obviously becomes paramount. And how are you thinking about capital allocation and the balance sheet over the next couple of years? And how do you plan to orient or reorient it?

Sure. That's a great question. We are laser-focused on shareholder value creation, and so capital allocation is something we spend a ton of time thinking. And I'll probably split sort of capital allocation in 2 buckets. The first one would be sort of capital structure and the second one would be strategic investments. From the capital structure perspective, we have been quite active in returning capital to shareholders. Just last year, we completed a $100 million program. And in general, this is one of the uses that might be meaningful for us over -- sort of over the coming years. And then in terms of -- and in general, we spend a lot of time thinking about how we can optimize our capital structure to make sure that we enjoy the lowest cost of capital and that our shareholders get the most value. And then on the strategic healthcare asset -- or the strategic investment side, we see a lot of dislocations in the current markets, and we see multiple opportunities to deploy capital very accretively there. We also try to be very fiscally disciplined and we look at everything through a very sort of risk-conscious lens, but we think that we have been building a very productive platform with IST and with some of our strategic assets, and I would anticipate us to be relatively active in continuing to deploy more capital there.

Got it. Maybe could I also squeeze in a question around -- especially for a structure like this, the contribution of the business development teams becomes very important in terms of going off the right asset and else. So how would you incentivize the team and ensure that, as you think about capital allocation, it's geared towards both near-term returns and long-term value accretion? And how would -- how is the team incentivized?

We -- our incentive structures are very much aligned with our long-term views. As I mentioned, we don't try to cut corners. We try to be very diligent in terms of how we look at investments, and we try to be robust in our decision-making processes. We have very significant expertise in-house, but then, through our network, we also have a -- we also rely on a number of consultants to help us make better decisions. And I think so far we have been able to deploy capital in value-accretive fashion, and I would anticipate us doing that in the future as well.

Fantastic. Maybe with a couple of minutes remaining, would kind of leave it open to you to maybe bring about any key closing comments or topics that we didn't touch upon and maybe call out some important trends that you're seeing in the industry impacting or benefiting the company.

Thank you. So I think that the current market environment, which is probably characterized by volatility and change, actually works quite well for a well-capitalized company like ourselves, which in some ways might be insulated from some of those market forces. And we are very excited about the opportunity to support some of the companies that might be more impacted by, sort of, by external forces. We think that this is actually a very interesting time to look at sort of opportunities for capital deployment. But in terms of our overall business, I think there are going to be very -- sort of very meaningful inflection points in different areas of the business. I hope that the royalty business will sort of -- will continue delivering in the way it has in the past. I would anticipate meaningful growth from our IST business. And we started this year with 3 products in the market, we could end the year with 5 products in the market, just to give sort of a sense of that pace of change and expansion in that business. And then there are multiple milestones in our strategic healthcare assets which we think could be very meaningful inflection points as well. So it's a very exciting time.

Absolutely. So I wish you the best, and thank you for joining us at the conference. Pavel, it's a pleasure to have you on here. And I wish you a very productive conference. Thank you.

Thank you very much. Appreciate it.