Innoviva, Inc. ($INVA)

All right. Terrific. Let's go right into our next session. I am very pleased to have Pavel Raifeld, CEO of Innoviva Pharmaceuticals. Pavel, thank you so much for being with us for the afternoon session.

So maybe, Pavel, just for investors listening on the webcast and those online and maybe those for those not pretty familiar with the story, let's just start to level set with a little bit of a brief evolution of the company, it's colpillars and what your view makes in Innoviva different.

Perfect. Asad, thank you very much. It's a pleasure to be here, and I appreciate an opportunity to attend the conference. So I think that Innoviva is a somewhat usual -- is some of the usual company. And our routes are that -- a number of years ago, we invented the technology that's being used in some of the most commonly used stand COPD treatments, which have been commercialized by GSK. And we are receiving royalties on those revenues. And so when I joined Innoviva few years ago, we, in many ways, looked like a pure-play royalty company. And so over time, in our efforts to create value for shareholders, we have built a much more diversified business, which right now has 3 pillars and I believe that each pillar contributes very meaningfully to the value creation opportunity for Innoviva. The first one is royalties. And over years, we have found those to be remarkably resilient, and we believe them to be very durable. The second pillar is our operating business in the Innoviva Specialty Therapeutics, which is a commercial stage of hospital business focused on infection disease in critical care that has been growing at 40% or 50% a year, and it's a wonderful and we think it's a wonderful platform for continued capital deployment. And then last but not the least is our portfolio strategic health care assets that was valued at over $700 million as of the end of March. And this portfolio is a collection of high potential opportunities that we believe can generate a lot of upside for our shareholders. And so I think that the combination of these assets provides us with a unique opportunity, which has a -- which is fairly meaningful downside production through cash and royalties that we are receiving. And the same time provides multiple opportunities for growth and value creation -- our operating business and then to our strategic health care portfolio. All in, I think this is a business that is designed to do well across a range of market environments, including sort of the high volatility environment, which we're in right now.

Maybe before we get into some of the specifics of each of these bubble, which one of those three pillars are you personally right now spending more of your time on? I mean where is the sort of like whether it's from a resource allocation perspective or whether it's from -- as it relates to your own time, like maybe just give us the cadence of how those businesses are evolving, just a high level.

Sure. So that's a great question. I think I'd probably spend the bulk of my time on the letter to businesses. I think that Isis our fastest growth business. and there is a lot of opportunity for value creation there, both organic and inorganic that we are trying to capitalize on. And then, of course, continued capital deployment is very important to us. And in the portfolio of businesses within our strategic health care assets is -- also has tremendous opportunities for value creation. And because of that, I tried to spend my time where I think it will benefit our shareholders...

Yes. Okay. All right. Let's start on backing maybe each of those, Pavel, if I may, starting with the royalty business. How are you thinking about the durability of [indiscernible] in light of ongoing pricing and policy developments or maybe just high level on how these revenue streams have been holding...

Sure. That's a great question. We've been incredibly pleased with the performance of our royalties for a number of years. And I believe them to be both resilient and durable. Over the last few years since I joined in Innoviva, we've seen their performance across a wide range of environments, including some as disruptive as covered and we've been continually impressed with how stable these royalties have been. We -- I also believe the royalties is very durable. There is a very strong patent estate, against these royalties and because they are drug device combinations. There is a lot of regulatory aspect and complexity associated with them, but I feel further builds out a moat against any potential competition. And then importantly, these are extremely well-known, well-characterized therapies, which are large domain in service. And in this -- for these disease states, patients and physicians are generally speaking, and willing to change things if patients are well controlled, whatever service they are. And so I think that this embeds an extra layer of stickiness into the road. And then last but not the least, right now, we're generating about 1/3 of revenue from the U.S. and then 2/3 from ex U.S. markets. And while people have spoken about policy changes and some of the pricing pressures in the U.S. in Dynamics and markets are quite different, and it's a much diverse collection of markets. So we think that this diversification provides us with further stability across the revenue portfolio. So all in, we have high hopes for [indiscernible] if you look at consensus estimates, people generally believe that we would get about $1 billion of royalty revenues over the course of the next 5 years. And so we view that a significant source of value for...

And who do you see as sort of your main competitors in the field to that business, specifically? And maybe talk a little bit about how like the arc competition has been evolving to that business model for both in the U.S. as well as in...

for these asthma -- COPD treatments. So this -- this is a market that has been -- that has had a number of -- that has had a number of existing players. It's been fairly stable. I think that the arc of actually hasn't changed it meaningfully for us. We are, generally speaking, addressing mild-to-moderate patient population and a lot of innovation has centered on sort of much more advanced patients. And so we think that, in some ways, we have been insulated from some of the competitive pressures which affected the other products in the asthma or COPD.

Got it. Okay. Maybe let's move on then to the IST business. What is driving the growth algorithm across that portfolio today? And how should investors be thinking about its scaling potential?

Another great question. So we designed IT business to the commercial stage roll up in the hospital and infectious disease space. And so far, it has panned out in line with or a bit ahead of our expectations. We've built it over the last several years through acquisitions and integration of a couple of different companies. And right now, we have a portfolio of 4 market products. We have another product that's in the -- that's been approved, but hasn't been launched yet. And so -- and so we think that our ability to resource the portfolio appropriately, that the strength of clinical -- the strength of clinical evidence against our products and generally strong commercial execution have been the key growth drivers. And I would also say that we designed this -- I don't think of as a single product entity -- multiple products. I think of it as a platform. And it's a platform that has been designed to commercialize products. We see multiple opportunities for inorganic growth in the space and we would be excited to put additional products on our platform.

Do you think that sort of your scanning as you look across the horizon that sort of makes sense for that business as you think about other products?

Yes. So I mean, we've been looking at a number of products. I mean, generally speaking, it's a commercial stage platform and social energies are likely maximized in that stage, but we've also been looking for development stage opportunities. And while right now, we have presence in critical care and infectious disease. Hospital is a -- hospital channel has multiple other therapeutic areas there. And so we've also looked at opportunities in other areas as well. All in, we are looking for differentiated assets. We think that our capabilities would make it is.

Let's talk a little bit, let's stay with that for a second on that business just in terms of, I guess, near term, the overall business trends. You provided a 2026 U.S. revenue guidance of $150 million for the IST business. So maybe just level set us on how you're tracking towards those targets?

So yes, we provided that guidance, and we still have confidence in our ability to achieve that. For the business, the business has continued performing very strongly. For reference, we generated Q1 revenue of approximately $34 million in the U.S. and -- which represents very meaningful growth over past year and importantly, growth over Q4, which generally speaking, tends to be the strongest quarter of the year for a hospital business such as ours. So we feel quite comfortable with both our '26 commercial performance, but importantly, in the longer-term trajectory of our business.

Let's talk a little bit, Bob, about the hospital market broadly before diving into products. Talk to us about the dynamics in the hospital space right now, what do those like?

Well, I think that the hospital space in general is fairly disciplined and selective. I think hospitals are very focused on products that can deliver meaningful clinical and perhaps economic value to key stakeholders. And I think we, in many ways, unlock that our product portfolio delivers [indiscernible] We think despite -- I know that some people view hospital channel is a somewhat challenging phase. But we think that given our growth rates of 40% or 50% in the U.S. year-on-year, we've managed to successfully navigate the channel.

And I guess when you think about what the most important levers are advancing product adoption within the hospital setting, what would those be?

That's another great question. I mean, ultimately, there are very -- there are multiple stakeholders involved their formularies and stores and kind of physician communications and everything else. But I think it really comes down to me for me is clinical differentiation. Because ultimately, it's important to have products that fit in that your place equipment paradigm from both clinical and economic perspective. we are likely to have these products. And so a lot of what we do is engage in medical education, commercial and other activities to really explain the value proposition to hospitals and in some ways, to let our products shine.

Let's talk a little bit about those products. Pavel, XACDURO and GIAPREZA. So maybe those are both significant products for you. So maybe just start by reminding the audience what the key addressable markets are for those and what the key treatment and new settings are?

Sure. That's a great question and always excited about an opportunity to talk about our products. So XACDURO is used in adults for hospital-acquired and ventilator-associated pneumonia driven by susceptible Acinetobacter infections. This is an area -- these are very serious infections and is area of very significant unmet medical need. There are about 40,000 patients that sold in the U.S. a year and about 40% of them are [indiscernible] resistant with the resistance rates rising. So this is an area of strong unmet need. And importantly, XACDURO was the first product that was specifically even signed for and approved in acinetobacter. So it has a very, very clear use case in this infection, which allows it to address some of them stewardship and other concerns that might have affected more broad use antibiotics. GIAPREZA is critical care product. It's used to stabilize blood pressure in other distributor shocks. And it has a very important place after kind of the first and second line treatment. There are approximately 140,000 patients for whom it could be applicable. And there is significant mortality rates associated with the subject And we are very happy to be for this alternative to physicians.

And how have the launch has been...

So I think the flexibility of the launch has been one of the most successful launches in antibacterial space over the last decade. And I think that has been driven by sort of the very specific use case of XACDURO which helps navigate the leadership and other concerns and just general sort of compelling nature of the data in a situation in a disease state where the health burns just GIAPREZA is a more established product, but in our hands, following the acquisition of Lacoon Pharmaceutical, which developed the drug, we've been able to generate a very significant revenue growth rates. I think it's driven by adoption and our ability to appropriately resource the drug and tell the story.

And I guess where are you in terms of market penetration for both products?

So I think -- so I think with XACDURO, we are in out to So we're just -- I think we're just scratching the surface of the market. Our sales more than doubled last year, and we expect a robust continued growth on a going-forward basis. It's a drug that's -- that has physicians have been asking us for this drug, which is somewhat unusual. And then GIAPREZA is a more established product where it has a very specific and important use case. So we've -- and we've been able to both facilitate greater adoption in hospitals that use it as well to broaden its use the new hospital given some of the -- given some of the strong data that has been generated today and our ability to continue generating data through investigator initiated and other relevant trials.

And so those are the levers that you have in terms of driving the growth for these products?

Yes, that's right. It comes down to data, medical education and strong commercial execution. And these are -- in both of them, but especially XACDURO, are relatively young products, which are early in their launch phase, and we expect areas of continued growth from them.

Maybe before we move to the next topic, any questions from the room? [indiscernible]

That's a good question. I think that the general opportunity for us is fairly broad. Ultimately, it -- and if you think about it, we have presence in the hospital channel across multiple areas. There are some physician communications, pharmaceutic communications, administrative communications, health system communications, et cetera. And so depending on the specific product and the specific -- depending with the specific product specific use case, our existing infrastructure might -- we might be able to rely more or less on our existing infrastructure. All in, we look at all products where we think that our capabilities lend themselves to or products above all, we look for [indiscernible] differentiation. One as hospital launches is making sure that we work with products that deserve proper space in the treatment paradigm.

Maybe let's talk a little bit about the strategic health assets. So Pavel, explain to us how those assets fit into your broader value creation and your capital deployment framework?

That's a great question. So if we go back thinking about sort of the other detailers on the business, so royalties provide us with positive cash flows significant downside production. Our operating business, IST, provides us with meaningful growth that we hope will accelerate over time with some inorganic movement. And then strategic health care assets provide us with further opportunities to generate value for our shareholders. These are assets which we believe have a symmetric risk reward profile, and which could really drive significant value. We spent meaningful time thinking about these assets and providing capital to these assets. I think a good example of an asset in this space is a company called Armada, which is a very innovative company focused on that -- specialist. And over the course of the last several months, they own the company for a few years and have been a very meaningful supporter of theirs. Over the course of the last several months, they have had a very impressive Phase II data in Sephoras bacteremia, whereas they achieved 100% clinical kill rate in a very, very challenging patient population. And on the back of the data, they've experienced very meaningful share price growth. And to us, that's a good example of the opportunities that we are looking for, having a chance to find companies to support them through longer-term value creation and then hopefully to we see the value crystallized for the benefit of our shareholders.

Besides mother any other assets that you'd want to highlight?

Yes, I think -- I mean we have a few other assets space. There's a neuroscience platform, is running in a Phase II trials in depression, but also has some interesting early stage assets. And a couple -- last year, we acquired a very interesting drug delivery platform called Link that will provide more color on in the coming weeks and months. But all in, we think this is a very strong collection of assets and a meaningful part of our value proposition.

Let's talk a little bit about capital allocation. overall corporate strategy. You've got a very sizable cash balance. So talk to us about how you think about capital allocation...

Of course, so I think broadly speaking, there are probably three different areas of capital allocation that we think about. The first one is related to supporting inorganic growth there. We think that IAC as a platform has proven itself and that we could create value by putting other assets platform. And so we spend some time thinking about what would be great assets there as we just discussed. The second part is supporting both our existing investments, but then looking at new investments. within the strategic health care asset bucket. And we're looking for opportunities where we were our financial resources, but also other capabilities might help create long-term value. And then last, but not the least, we're also focused on capital structure optimization. And in particular, we believe that a cash flow positive company sort of should consider returning capital to shareholders. And so we recently initiated a share repurchase program.

And that's $125 million authorization, and how much of that has been completed?

So as of the end of fourth quarter, we completed $25 million of that of the $125 million authorization. And we believe -- and I think that the program is both a way for us to return capital to shareholders, but I think it also conveys our high conviction sort of in the prospects of our business. And while we don't have any specific commitments in terms of how quickly we'll execute on the program, we still believe that we are undervalued.

And I guess, in terms of other capital allocation levers, what sort of BD interest do you have? What kind of external opportunities most [indiscernible]

So we've considered our wide range of things. We've continued supporting Armada over the course of this year. We also remain in their neuroscience platform. And then we've also looked at a number of opportunities in which included -- orphan diseases in certain other areas. We try to be more strategic in terms of how we set up the...

And how should investors think about the scaling potential of the platform...

I think the ability to scale the platform is a significant part of the East -- We designed the platform provide scale. I think that over the last couple of years, like we put the right bonds in place. And I -- and I think that right now, we are -- and I think right now, the platform is ready to continue to There is very significant operating leverage embedded there. And I think that if you look at our revenue, with our kind of various performance operation performance indicators. It's a very strong platform. And so I would anticipate that we would accelerate revenue stability delivery with an organic growth over the coming quarters. But specific size and timing would depend on a host of things.

And I guess when you think about strategically over a longer period of time, Pavel, maybe 5 years, 10 years, right? Like what do you -- what kind of -- what do you see as the sort of future in to us sort of like what the vision is, maybe a 5-year?

Sure. I think that's great. So my hope is that over the next 5 years, we'll continue generating significant revenues from our royalty portfolio. I would anticipate that we would generate significant organic growth from but then we would complement that with also very significant inorganic growth. And then I would anticipate that we would get sort of a significant value accretion from some of the companies in the strategic health care portfolio bucket. And that perhaps we would build another vertical of Innoviva based on one of the assets below something...

What could that look like?

Well, I mean if you think about ISC, we started -- ISC started with our investment into Entasis. Then over time, we took Entasis private and then we combine it with La Jolla to build out ISCS. But the thing to say is we tend to be -- we tend to be very disciplined in terms of our capital allocation, and we are very mindful of correlating risks with financial rewards. Prudent capital allocation -- trying to be very disciplined.

Maybe going from long term to shorter term, Pavel, what are the most important value drivers or milestones for Innoviva that investors should be paying attention to or call it, next 12 to 18 months?

That's -- so leaving aside the I think that continued revenue delivery, especially given XACDURO and -- XACDURO launch and GIAPREZA. I still would be very interesting to watch. I would also anticipate the launch of New Solvents in the second half of this year. And so that would also be sort of a meaningful value driver. And then we have multiple things within our strategic health care asset portfolio. I think that Armata dissipates initiating a Phase III trial in the second half of this year. And then we also expect readouts from Syndeo over the course of the next 12 to 18 months. And then, of course, last but not the least, there could also be updates on things strategic over the course of this time. All in, I think it's going to be sort of a very busy calendar for us with significant growth and multiple capital.

Okay. Any questions?

[indiscernible]

Well, so we have started to conduct our activities related to potential launch prep cereal the customer stuff. I think in general, the way we think about the solvents is that there might be two time horizons for the product. And I think initially, there is a standard of care, which is fairly efficacious. We know that resistance rates in some markets outside of the U.S. are extremely high. There are markets where it's like 30% to 40% and perhaps more than that. And answer all the experts believe that ultimately [indiscernible] There are some early signs of that [indiscernible] I think that initially, the market -- the use case for resolvent is going to center around its oral availability as a replacement for like a very painful intramuscular injection administered in an office. But then I think -- and we'll -- but then I think over time, the whole market for is going to become -- is going to open up. And I think that based on the product profile of solvents, we could actually capture a very meaningful market share. And just as a reminder, the market in the U.S. is about 1 to 1.5 in patients, depending on sort of how you look at it. So I think that the opportunity for us will ultimately be very sizable, and we'll make sure to the extent we launch it ourselves. We'll make sure to resource things commensurately with the month of...

And then, Pavel, maybe just to close on the couple of minutes we have left, leave us with how should we think about how you balance downside protection from the royalty base with the upside from IST and strategic assets?

That's a good question. So I think that Innoviva has a very unique business model, and in some ways, it's an all-weather business model. In that we can actually -- given the diversity of our business, we can actually thrive in multiple market environments. And I think that comes in -- and that's especially relevant in high volatility environments like right now. I think that in risk of environment, the cash flows are the dose production, the cash on hand that we have actually allows us to perform well. But importantly, it also creates more opportunities for us to deploy capital. And then when we have risk environment, hopefully, some of our investments pan out and we can actually continue generating value for our shareholders. And I think that the combination of the 3 different pieces. So the royalties, which are stable, resilient, well characterized, the high growth that's embedded within the business. And then the disruptive potential that I believe is embedded within our strategic health care assets. All of these things come together to create an opportunity for growth, but at the same time, also in a way that meaningful protects downside. I think it's a very unique opportunity, and I'm very excited about what the future might hold for us over the course of this year and then, of course, beyond.

Well, I think that's a great place to close. Pavel, thank you very much for the very candid thoughts and the conversation and really appreciate you being with us.

Thank you very much. Appreciate it.