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

Well, thanks for joining, everyone. Today with us, we have Pavel Raifeld, the CEO of Innoviva. Pavel, thank you for joining us today. My name is Jason Jun, Managing Director on the Biopharma Banking team at Citi. So here today for Innoviva's fireside chat. So Pavel, thanks for joining us.

Thank you, Jason, for hosting us.

Great. So Pavel, why don't we just get started with a quick overview of the company and I think specifically, if you wouldn't mind just walking us through the three business pillars at a high level, we can start there.

Sure. That sounds wonderful. And once again, thank you for the opportunity to present the Innoviva story. First, I think it will be helpful to start with some background information on how the company was formed. Innoviva was originally founded to manage royalty revenues for products that we developed with and licensed to GSK. And as the royalty revenues for these products, Breo and Anoro, became more meaningful over time, we decided to build out other areas of the business in an effort to create long-term value for our shareholders. And so as a result, Innoviva right now is composed of three business areas to which you alluded earlier. The first is a steady royalty stream from two widely used and highly differentiated respiratory products marketed by GSK. The second is a fast-growing critical care and infectious disease platform that we refer to as Innoviva Specialty Therapeutics, or IST, which includes four commercial stage products that are growing at over 50% a year and also a late-stage pipeline candidate that could be approved this year. So it's a very high potential business. And the third is a diversified portfolio of promising health care assets with high growth potential, which are currently valued at approximately $450 million.

Great. Well, thanks so much. Why don't we just talk about the company strategy for a second because these are pretty 3 unique parts of the business that typically you don't see belong to a biotech company, right? So if you can just share a little bit about how you think about each of those from a -- how do they complement each other from a business perspective? And how do you think about optimizing risk reward for the company and ultimately value creation for shareholders?

Thank you. This is a terrific question that speaks directly to how we appreciate the unique value proposition to the business. We believe that Innoviva is a uniquely positioned company in the biopharma space to unlock value without the typical binary risk. If you think about us, first of all, we're profitable and well capitalized. Given the durability and stability of our royalty stream, we have very significant downside protection across all market conditions, and we can also be in charge of our own destiny, unlike some of our peers. Secondly, we also have a very differentiated and complementary specialty therapeutics business that I spoke about. And this business offers very high growth potential and multiple shots on goal with each product addressing an area of high unmet medical need. And third, our strategic health care portfolio could really unlock some very meaningful and disruptive value creation with minimal financial commitments. And so if you think about it, it's almost a layered business with stable and growing revenue streams and very significant upside opportunity, yet very significant downside protection as well. I think it's a very unique proposition.

Great. Super helpful. Why don't we just go tick through each of the business pillars, right? And let's start with the GSK royalties. Obviously, this has been a core part of your business. If you want to just share with us some of the recent trends, some of the business drivers behind the underlying products for your two sort of royalty streams, specifically, if you can speak to the durability of that franchise, let's start there, and I have a couple of follow-ups.

Sounds great. So we received royalties from two of the most commonly used asthma and COPD products, Breo and Anoro, which are commercialized by our partner, GSK. These products are considered to be maintenance therapies. And so we think it will be less likely for patients to go off treatment and disrupt current therapy should a generic or competitive threat appear on the market. And these products are marketed very broadly outside of the United States and are still growing in many of these countries, providing additional diversification and durability as the competitive pressures seen in the United States are significantly greater than those in many other regions. So overall, we feel quite good about the stability and the status of these revenues. And if you look at the performance of Breo and Anoro over the past 3 or 5 years, they have been remarkably stable. It's also very important to note to your question that Breo and Anoro are protected by an IP estate with meaningful remaining exclusivity across a very broad range of primary and secondary patents. And I think it's also very important to note that because these are drug device combinations, there are both drug patents and device patents that are sort of -- that are creating the moat around these two assets. Per our agreement with GSK, we expect to receive royalties until the expiration of the last relevant patent in each country where these products are marketed, which could be in the early 2030s for a lot of the major markets. And I think it's, generally speaking, worth noting that IP protection in international markets typically tends to be longer dated than in the U.S. And just to give you a sense of how some of the Wall Street analysts think about us, Wall Street consensus generally implies about $1 billion of royalty revenues accruing to Innoviva over the course of the next 5 years.

Great. Very helpful. And I guess, ultimately, how do the GSK royalties fuel the rest of the business, right? It is a great cash flow generating part of Innoviva story. You have these other two businesses that we'll get along to in a second. But how do you frame the cash flows that you get from GSK going into other parts of the business as well as from a capital allocation perspective?

Sure. Thank you. That's an excellent question and something that we think about quite a lot. We I mean, we're very focused on deploying capital in a way that maximizes value creation for our shareholders. And that has, generally speaking, sort of come in two veins. The first one has been capital structure optimization. And for instance, we have been quite active historically in terms of doing share repurchases and things of that sort, making sure -- when the circumstances are right, making sure that we are able to generate meaningful value. Secondly, we have also made a number of strategic investments, which right now forms our -- which right now are our IST business and also our strategic health care asset portfolio. We see many very interesting opportunities to continue deploying capital productively in these two areas. And so obviously, strategic activities are a little different -- difficult to predict and markets have been volatile recently, which, by the way, we think bodes well for our capital allocation strategy. So -- but overall, we think that we're in a very good position to sort of to continue deploying capital well and continue generating value for our shareholders.

Great. And I'll come on to capital allocation towards the end because I think that is an important question that I think investors have regarding the company. But just going back to the second business pillar, which is IST, right? If you can just sort of help outline for us what is the overall strategy for the IST business? You have many marketed products, you have pipeline products. Obviously, you're very focused on the commercial execution, the ramp and the growth. And then also you have a pipeline behind it as well. So if you can just share with us a little bit about how you think about the business we'll start there?

Sure. It's a great question. And it's a business that we are both very proud of and also expect great things from. So our overall goal has been to build a best-in-class sustainable business in the infectious disease and critical care space, creating shareholder value while at the same time, meeting the needs of patients that we serve. And so IST has been rapidly growing organically. As I mentioned, we have had 50% plus revenue increases year-on-year. And so of course, commercial execution is key to its success and we anticipate continued strong commercial execution. Having said that, we continue making targeted investments in R&D. And for instance, Zoliflodacin, sort of our regulatory stage product candidate with a PDUFA date towards the end of this year. And at the same time, we have also made some thoughtful inorganic investments like our most sort of our latest product, Zevtera, which we in-licensed last December and launched very recently. And so we anticipate, given the high productivity of this platform that we can -- that we're going to continue sort of building it out. And there's a ton of organic growth still embedded there. And we think that we can accelerate revenue delivery even further with thoughtful inorganic growth.

And maybe just on Zevtera. Obviously, that's early stages in the launch, but thoughts on how that launch has been going so far, some of the progress made and ultimately, how you -- how we should think about the size of that opportunity?

That's a great question. So far, the launch, we have been pleased with the market receptivity and how the launch has been progressing. And obviously, it's early days, but we feel good about sort of all the operational metrics related to the launch. Secondly and importantly, we think that Zevtera address -- well, no second. We think that's because Zevtera addresses a very meaningful market. There are approximately 120,000 Staph aureus bacteremia patients with infections in the U.S. on an annual basis. And almost 50% of those come from medicinal resistance strains. Zevtera addresses a very serious unmet medical need where second and third-line treatments are needed in light of growing global resistance to vancomycin and daptomycin. And so from -- so this is a very sizable market. And from a commercial perspective, we think that sort of the needs of Zevtera from the commercial platform perspective are very similar to the platform that we have right now. And overall, we think -- and by the way, Zevtera is approved for three different indications. The bacteremia one is probably sort of is probably the most -- you could call it the most -- the lowest hanging fruit, but other indications might provide sort of incremental opportunities for growth for years to come.

Yes. And then just moving on to Zoliflodacin. Obviously, you've got the PDUFA date coming up in December. If you can share a little bit about the size of the opportunity, the unmet need and how excited you are about that PDUFA date?

Sure.The short answer is we're very excited, and we're making a ton of preparations in advance of the potential approval. So maybe to just frame the opportunity there. Gonorrhea is one of the most commonly diagnosed sexual transmitted infections, and it has over 80 million cases a year globally, including over 1 million of cases in the U.S. alone. And currently, patients are generally speaking, treated by standard of care, which involves a fairly painful intramuscular injection. What's interesting there is that there is growing resistance in the space. And there are markets in Asia where resistance reaches levels of 30-plus percent. And I think that there are nascent signs of early resistance in the United States. To the effect that resistance becomes sort of more prevalent, we think this creates -- this creates a very meaningful commercial opportunity for our product, even aside from the commercial opportunity created by the fact that Zoliflodacin is an orally administered product that's simply more convenient and user-friendly. And so we think that, that bodes well, that this product profile bodes well for the overall commercial opportunity.

And then maybe we talked about the two products. But if you take together the 2 plus the established portfolio across Giapreza, Xacduro, Xerava and others, right? I guess the question is, how would you frame the -- as one of the very few commercial stage established IST businesses out there, what are the benefits of being in the business as one of the very few companies out there in terms of access, in terms of scale? Are there some natural synergies between the different products? And I think the related question is, I think, from your perspective, how big ultimately do you think the IST business can become if you take together the potential across those products?

That's an excellent question. And this actually speaks to the original thesis behind creating IST. Historically, when we looked at companies in the infectious disease space, we saw that there were a number of companies and products that were addressing significant unmet medical needs. And yet at the same time, some of them have not been sort of as successful as the unmet need would indicate. And that came down typically to forcing R&D stage companies to build commercial capabilities, but also companies trying to operate as single product entities and frankly, not having enough scale. And so when we were architecting IST, we wanted to build a business that would have sufficient commercial scale to execute well. And I think that right now, IST is at a point where it's almost the perfect balance between, on one hand, being a very nimble and on the other hand, having sufficient scale to be sort of to be structurally profitable. Our current product portfolio is very synergistic with each other, which is why kind of we built it this way. And we think that there is a tremendous opportunity to build a sustainable business even on the basis of the portfolio that we have right now. For instance, I think that based on our current products, our peak revenues at IST could be over $0.5 billion, but also because we are one of the, I believe, premier consolidators in the space, I think there is a tremendous opportunity for us to grow inorganically as well, which can create further shareholder value and get these medicines to patients who really need them.

And what is the strategy for continuing to add products via BD and M&A? I guess what is the criteria that you use to evaluate assets? Is there a lot of competition when you look at assets? If you can share a little bit more color on that.

That's a great question. I mean, in general, when we look for assets that would be a good fit for IST, we're focused on the product profile and differentiation, the overall market size and resulting commercial opportunity and synergies and fit with the rest of our business. I think given the success of the Xacduro launch to date, and I believe it's one of the most successful launches in its space in the last several years, we are seen as a premier sort of commercial partner for a number of companies who are great developers, but who might not have specific commercial expertise or capabilities. And I think that as such, we see a fair amount of flow of various opportunities, and we try to be very thoughtful about products that we take on. And we see a ton of opportunity to create value this way.

And is there a -- in terms of stage of development for assets that you look at, is there a preference for commercial/immediately accretive assets? Or are you willing to take on some clinical risk looking at late-stage assets in the clinic?

Yes and yes. So I think that synergies, generally speaking, are maximized by commercial and pre-commercial assets. And by the way, we think that aside from commercial capabilities, we have excellent regulatory manufacturing capabilities, which are particularly applicable to pre-commercial assets. And we are also willing to take on some clinical risk as well. And overall, we see a number of opportunities. And for us, frankly, it's more about product differentiation because we think it's differentiation that ultimately is able to satisfy an unmet need and then drive potential revenue opportunity.

Very helpful. If we pivot a little bit to strategic health care assets, we would love to hear a little bit more about strategy around these investments. How did you first come across these opportunities? How do you decide to invest in them? Is this a big focus area for the company? Is this a broad effort? And ultimately, how you landed on a couple of these investments?

Sure. This is a great question and also one area where we ask ourselves all the time. So are we thinking about sort of the opportunities the right way. In general, we are looking for opportunities or assets which address significant unmet medical need, have very significant commercial opportunity and where we think there is a meaningful dislocation from sort of the fundamental value of these assets. And when we make investments in the assets, we try to aside from capital, which oftentimes and especially in these markets can be quite valuable. We also bring to the table other things, including sort of strategic operational and other expertise.

Yes. Very helpful. And then maybe I'll just pick on one of the strategic health care assets, which is Armata, which actually had some pretty exciting data recently. Can you comment -- and that's, I think, a company that you own 60% plus of the company from a public disclosure perspective. Can you comment a little bit about next steps for the company post its recent Phase II data?

Sure. So -- and maybe I'll first begin with a little bit of information on Armata. Armata is a bacteria phage company, and they are advancing new therapeutic modalities in the phage space. They -- as you noted, they recently had some very exciting clinical data in Staph aureus bacteremia, where they were able to show a 100% clinical response rate in a very difficult-to-treat population. This is breakthrough and fairly extraordinary. They are and we are very happy with this result. And so they continue to advance this program toward a pivotal trial. And if successful, they could -- they might potentially be the first phage to be approved in the U.S. market.

And then just maybe one more. I think recently, Gate or now known as Syndeio also recently closed a financing round. Can you talk us a little bit more through about that company and its programs and why you're excited about that investment?

Yes. Syndeio is definitely an investment that's very important to us. And it's -- they have a portfolio of significantly derisked CNS assets in development for depression and other related indications. They have a very differentiated platform to understand synaptic health that's backed by a Nobel prize-winning scientists and his proprietary insights. We think that the data generated sort of in this platform fairly meaningfully derisks their assets relative to other similar CNS drug candidates. And right now, Syndeio is running a Phase II trial and I believe that if successful, they might get sort of a ton of value recognition from the outside world.

Yes. Great. And then perhaps one of the -- going back to capital allocation that we briefly touched on earlier. Obviously, this is a big focus area for the company, right? I guess as the business continues to generate cash, you're generating revenues from IST, right? This I'd assume would continue to be a real -- one of the highest focus areas for the company, right? How do you see yourself deploying more capital -- more or less capital in one business area than the other, right? And how do you think about potentially expanding outside of the three pillars? Or do you intend to focus on the three and look for opportunities within? How do you just broadly think about capital allocation going forward?

That's a great question. We -- so as you noted, we are quite well capitalized with about $400 million of cash on our balance sheet, which I think positions us well to make thoughtful capital allocation decisions. When we think about capital allocation, we we're looking both for opportunities to expand our specialty therapeutics business as well as to provide more capital to assets within our strategic health care portfolio that we think are productive uses of capital. We -- so far, we think that our IST platform has been a very productive use of capital. And we think that there are a number of assets in our strategic health care portfolio that are also very productive. For instance, Syndeio, as you noted, I think provides a very asymmetric sort of risk-reward opportunity for us, and we have taken advantage of that. Overall, I think it's difficult to be prescriptive here. But overall, I think as opportunities present themselves, we'll try to be nimble and opportunistic and channel capital to where the biggest opportunity is. And by the way, as I noted previously, historically, we've been sort of fairly active on the share repurchase front, and that continues to be an option for us.

Understood. Okay. Great. I think that just about rounds up the questions for today. So Pavel, thanks again for joining us today.

Jason, thank you so much. It's really a pleasure.

Okay. Great. Thank you.

Thank you.