Thank you for joining us for our fireside chat with Innoviva. We have with us here today, Pavel Raifeld, CEO of the company. So to start, Pavel, for those who are not as familiar with the story, could you give us a brief overview of Innoviva and its current focus areas?
Sure, Louise. Thank you very much. It's really a pleasure to be here, to see some of the other companies and all the innovation that's happening, and to be able to share our story and what we have been doing and why we're quite excited about what the future holds for us. So originally, Innoviva was created as a company to manage and maximize value of royalties from Anoro and Breo. You know, which is some of the most widely used sort of respiratory royalties commercialized by GSK. And then over time, kind of, you know, we really tried to diversify away from the royalties and to create value through capital allocation.
As a part of that, you know, we managed to optimize our capital structure, you know, return some money to shareholders, push out debt maturities, but importantly, we also built, I think, made some very interesting investments and built some incredible businesses outside of the royalty space. Right now, we have three main business segments, which are interesting on a standalone basis, but I think are also highly complementary to each other. The first one is the royalty portfolio. You know, we're still. You know, it's proven to be very durable and resilient.
You know, consensus estimate point that over the next five years, you know, you know, our royalties would likely exceed $1 billion, you know, which obviously is, you know, is very valuable to us and which we're very excited about. Secondly, and importantly, over the last couple of years, we have built a hospital operating platform that we call Innoviva Specialty Therapeutics or IST. And in the past 12 months, the platform generated nearly $100 million of revenue, and it has been growing very nicely. And we're very excited about both organic growth embedded in the platform and sort of, you know, potential other opportunities.
And last but not the least, we have a portfolio of strategic healthcare assets, which is currently valued at over $500 million on our books, and which we think provides us with very strong and asymmetric beneficial payoffs.
Okay, great. Can we dig a little bit more into Anoro and Breo and why you feel confident in the long-term outlook for this? I know there's some change, potential changes in the competitive landscape, so what gives you confidence you'll still be able to collect royalties at a rate that you currently do?
Sure. And so Anoro and Breo are some of the most well-known and widely used products in the space. You know, they are an ICS/ LABA and a LAMA, LABA/LAMA, you know, representing two of you know the really important classes of products. And we have been getting approximately $250 million of royalty revenues a year. These are kind of... These are very important maintenance therapies in that, you know, they are well-liked both by patients and physicians, and typically, as long as a patient is controlled on the therapy, you know, physicians are sort of, you know, unlikely to make any changes there.
We don't really foresee any novel, you know, products on the horizon, which we think are going to be disruptive to our, you know, to our assets. Most of the innovation in this space happens to be more on the severe spectrum, whereas we happen to be more on the sort of, you know, mild to moderate spectrum. And last but not the least, we think that there is a tremendous durability embedded here, in that, you know, these products are protected by a very strong patent estate across drug, device. And then also, we think that the manufacturing and regulatory complexity create an additional moat around these assets.
One other thing I would want to note is that although we are based in the U.S., and so we have all kind of, you know, seen some of the pricing pressures in the U.S. markets, the majority of revenues for these two products are coming from ex-U.S. markets, which tend to be sort of, you know, fragmented, hence, kind of, you know, less subject to, you know... less likely to suffer from any particular disruption. And we are actually seeing pockets of growth in those markets, which also give us a lot of confidence in, you know, the cash flows from this product.
Okay, great. Can you talk more about your IST portfolio? What is in there currently? I don't know if you're profitable yet, but I think you will get to profitability soon. If you aren't, maybe just give us a little bit more detail on it.
Sure. Very happy to. So we're very proud of the business at IST and excited about its potential, and maybe just to give a little bit of background, so you know, the genesis of the business came through our realization that although there was very significant unmet medical need in the hospital and infectious disease space, you know, relatively few pure-play companies have been successful there for a variety of identifiable reasons, and we thought that we could actually craft a roll-up strategy in the space, which would allow us to overcome some of the challenges that others might have faced and to create value.
And ultimately, it comes down to sort of, you know, our product differentiation, our scale, and capabilities. And so a couple of years ago, you know, we started investing in the company called Entasis, which had a great R&D platform, and then we took it private. You know, when they got positive phase III data, you know, on their key product, we then acquired a company called La Jolla, which had an excellent commercial platform with a couple of market products. And so right now we have a business that has three market products, with one new launch that's performing very well.
You know, we got positive phase III data on another product, which we hope to get to the market soon, and overall, you know, I think that, you know, we'll have a premier asset in the space, which, you know, which is going to be, you know, very, very profitable in short order.
Okay, great. And are you planning on investing any more in this portfolio? You do have a sizable cash balance, or is this it for this portfolio, maybe you might create another vertical or, you know, what is your thoughts?
So we are. First of all, I would say that we're quite happy with the portfolio, and I think that across, you know, across very significant anticipated organic growth and strong operating leverage embedded in the portfolio, we think that it could do very well on its own. Having said that, I think that as a part of our overall roll-up strategy, we would like to bring on other assets under the portfolio, and we would be looking, you know, we'd be looking at assets that, you know, have strong fit with existing capabilities. And, you know, we're going to be very disciplined about how we execute it.
Okay, got it. Can you talk about XACDURO and what the opportunity is for you in the U.S. and also internationally as well? I know you have a partnership with Zai Lab.
Yes. So XACDURO is the newest addition to our portfolio. It's, you know, it's a product that it's kind of the first and only product that's proven to work in resistant Acinetobacter. And that's an area of huge unmet medical need, where you know you would get mortality rates of you know up to 50% you know even with the best care using alternative therapies. So it's. And this product is very important because it has been sort of. It's a great example of targeted innovation approach.
You know, whereas kind of we provide, you know, the product just to the right, just to the right patient, and this allows us to avoid a lot of the excess and stewardship concerns, which have, you know, presented challenges to other branded antibiotic launches in the space. So far, the launch has been going very well. We have very high, frankly, above our expectations. We have very high hopes, and we think that the reception in the medical community has been wonderful. I think as an indication of sort of how highly people think of this product, it was nominated for the Prix Galien, you know, which is a very sort of prestigious award in the space, and we're quite excited about the opportunity here.
XACDURO, you know, we have a partner, you know, as you mentioned, we have a partner in China, which is also very excited about the products. They have stated that they expect peak revenues of over $500 million from the product in their markets alone. I think that just gives a sense of how impactful and how exciting this product really is.
Okay. And if that's $500 million in China, what is that to you? How does that work?
So we're getting royalties and milestones on that product, which, you know, are going to be quite meaningful.
Okay. And then Zoliflodacin, can you talk to me about that, Gonorrhea market opportunity?
Mm-hmm.
What is that for you?
Sure. So, Zoliflodacin is the second, you know, pipeline asset that we sort of, you know, got ownership of through the acquisition of Entasis. You know, we received positive phase III data, you know, are anticipating to file the product with the FDA, you know, in early next year. And, you know, with any luck, you know, potentially get to approval sort of toward the end of the year. This, Gonorrhea is a very important and big disease. There are over a million patients in the United States a year suffering from Gonorrhea. Worldwide, it's eighty million. So there is a huge disease burden.
You know, while there is sort of a standard of care product that's working well right now, it's actually facing very meaningful resistance. In certain Asian markets, resistance rates are up to 30%. And so we think that Zoliflodacin or Zole, as we call it, could actually be a tremendously important addition to kind of, you know, to the armamentarium of physicians trying to fight Gonorrhea. And it comes in two ways. One, it's an oral product, and you know, a lot of patients would prefer that to an intramuscular injection.
To the extent you know resistance rates you know rise all over the world and you know specifically in the United States, this could actually be a huge market in the United States, you know, potentially over sort of you know $500 million.
Okay. Are there any competing products in development right now for Gonorrhea?
Yes, so GSK also has a product that they're working on in this space.
Okay, got it. And how would you compare and contrast your two products?
... we are, you know, based on what I know, I think that we have sort of an excellent clinical profile, and that our, you know, I would anticipate our product, you know, really being very, you know, very meaningful, sort of, you know, in doctors' minds, you know, assuming it gets approved, as they think about, you know, what might work best for their patient.
Okay. Before we move on to the other products in your pipeline and also the rest of your business, can you elaborate a little bit more on your strategic vision for IST over the next three to five years? You obviously wanna reach profitability, but how do you think about peak sales potential and international expansion opportunities, all those good things?
Sure. So I have very high hopes for IST. I think this is a great business, which has been demonstrating excellent growth rates, both, you know, for the kind of, you know, for the legacy products from La Jolla that have been marketed for a few years and which we managed to re-energize, plus the new launch, XERAVA. And so I think that it holds very well on its own, with very high growth rates that I would anticipate would continue for years to come, especially, kind of, you know, as, you know, Zoliflodacin might enter the market. But I also think that...
And my vision is to build IST into a premier hospital and infectious disease company in the space, and I think that we have made major inroads there. And then, of course, I think that, you know, there are ample opportunities for us for inorganic growth. And so the way I think about it is that, you know, the synergies probably get maximized, you know, via our commercial platform, but we also have very differentiated opportunities across manufacturing and regulatory and other areas that could be quite helpful in sort of, you know, advancing and maximizing value of, you know, potential new assets. And so, you know, we think that there are many assets available in the space at attractive valuations.
And, you know, I think given that other people recognize us sort of as an important player and potential consolidator in the space, a lot of them come across my desk and my team's desk. And then-
Okay, great. Can you talk about your strategic investments, and is there any synergy between those investments and your existing business, or are they just purely strategic investments that at some point you might monetize?
Mm-hmm. So we have a portfolio of strategic healthcare assets, you know, which we are currently valuing at over, sort of, you know, $500 million. And, I would like to say that, a lot of that portfolio are actually publicly traded securities, and we try to be fairly conservative, you know, when we assign, you know, when we assign values. Some of those investments, some of those investments are, you know, financial in nature, but I think that a lot of them also have a strategic overlay. You know, so to give an example, you know, there is a company, you know, there's a company called Armata, where we own approximately 70% equity, and we have presence in other parts of the capital structure.
And, you know, it's an independent, publicly traded company, which, you know, which I think has a very interesting platform. And, you know, and it's operating sort of, you know, in the infectious disease space, you know, which is the same space where IST has a foothold. And so, you know, that has, you know, that has sort of an interesting potential.
Okay. One of the questions that we often get regarding Innoviva is: why don't you just monetize your assets? You have three very different businesses, and there isn't a whole bunch of synergies between all of them. So how would you respond to that? What's your thought there?
So, I would say that, you know, I mean, in general, we're very focused on shareholder value creation, and so philosophically, you know, we would do sort of, you know, what we think is right in order to really help create and crystallize value. But secondly, and importantly, I think that there are actually some meaningful synergies between different parts of our portfolio. So, for instance, our royalty portfolio provides us with downside protection, but also with a source of cash flows that we could then use, and in the long-term orientation, to build out other portions of our business.
And we think that across, kind of across the royalties and, you know, the cash flows, there are our hospital operating platform, IST, and some of the strategic assets that, you know, we might want to continue deploying capital in, there are, you know, pretty meaningful synergies. And, you know, and I think that our shareholders get a lot of the sort of, you know, value and diversification for that.
Got it. Great. So in line with that, can you outline your company's capital allocation strategies over the next couple of years? How are you prioritizing things?
Sure. So I think that there are a few capital allocation priorities that you know that we have been looking at. One is, you know, I think that our IST business sort of you know could potentially use some capital for business development and inorganic growth. Secondly, you know, we have made some investments in the strategic healthcare assets, and I would anticipate us continuing to make those investments. And last but not the least, over the last few years, we have actually been very active in returning capital to shareholders, which I think is, generally speaking, the right thing to do for a cash flow positive company.
And so, you know, so for instance, over the past, you know, three or four years, we returned about $500 million. We just finished a $100 million equity repurchase program at the beginning of this year, and, you know, this is also something that's, you know, fairly high on our agenda.
Okay, great. So when it comes to acquisitions and business development, which you mentioned before, a lot of things come across your desk. What criteria do you use to evaluate potential deals?
So I think that the criteria depend a little bit on whether we're talking about our operating business, IST, versus other strategic opportunities. I think that for opportunities in the sort of, you know, hospital and infectious disease space, we're looking primarily for the fit with our existing platform, you know, both on the commercial side of things, as well as, you know, on the, you know, as well as ability to use some of our differentiated capabilities. You know, such as the regulatory and, you know, manufacturing ones that I discussed. Outside, you know, outside of that, I think we are looking for...
Outside of that, I think we're looking for opportunities that, you know, would allow us to address areas of unmet medical need and, you know, to really impact the society, while hopefully also kind of, you know, you know, done in conjunction with meaningful revenue opportunities. And there, it's very important for us to make sure that we have some capabilities which would allow us to create, you know, to help drive value for those assets.
Are there any specific therapeutic areas, product types that you're looking for? And then how is the market these days for business development in general? Do you see more opportunities, less opportunities? Where are you seeing the best opportunities?
So a good example of our strategic healthcare assets is a company called Gate. It's a kind of private company, you know, that has a phase II asset in psychiatry, in depression, you know, which is an area of very significant unmet medical need. And, you know, it has sort of there are opportunities to, you know, expand kind of that asset to other areas, and they have an excellent team, which I think is really able to, you know, to drive value there. And so, you know, this is an opportunity that, you know, opportunities like these are interesting to us.
In terms of what we're seeing in the markets, there's a ton of opportunities out there. I think right now the world is sort of bifurcated into haves and have-nots, and I think that there are many really interesting companies that you know that could be a good fit for what we're looking.
Okay, got it. And then you do have a finite life to your royalty portfolio.
Mm-hmm.
So over the next five years, this will, you know, move on. How are you thinking about the company after this?
Sure. One thing I would say is I think that the durability of our royalty portfolio and the resilience of it, you know, might be sort of, you know, might be underappreciated by the markets. But importantly, I think we already have, you know, assets. So, you know, I would, you know. So for instance, I think that it would not be unreasonable for revenues from our, you know, from our IST business to exceed, sort of, you know, broadly speaking, you know, the royalty revenues that we're getting right now over the course of the next few years.
I think that as we continue to sort of invest and build out sort of non-royalty parts of our business, I have full confidence that we're going to have, you know, a very stable and fast growth business to replace our royalties, you know.
Okay, and where would you see that being? Are there any verticals similar to IST where you see an arbitrage opportunity?
Yes. There are a few different verticals going beyond hospital infectious disease. You know, I think I mentioned that, you know, CNS is one of them- Rare diseases is another one. You know, there are a few that, you know, we are looking at, and, you know, being very interested in.
When do you think we might hear something on that front? Before the end of the year, more likely next year?
It's always difficult to predict sort of, you know, business development activities. You know, we're looking at things as they are available. You know, we try to be both decisive, but at the same time, very thoughtful and disciplined about what we're pursuing.
Okay, great. We have a few minutes left here, so I wanted to open it up to the audience for questions. Go ahead, Andrea.
Hi. In your IST portfolio, how would we think about your acquisitions? Would you have to add or take on the salespeople, or do you already have a salesforce? And how do we think about it from an SG&A standpoint, and if you have a target margin for how they fold into your existing platform?
Sure. So we already have a pretty, very productive and targeted commercial platform. You know, we do have, you know, we do have salespeople, et cetera. I think depending on if we were to, you know, to acquire a commercial asset, you know, depending on the asset, you know, we might have to reconfigure our commercial platform a little bit. But I think, you know, the nature of, you know, the potential acquisition would drive, you know, what the target commercial platform would look like.
Anything else? Oh, Carvey?
Historically, anti-infective companies have faced challenges with insurance reimbursement. How do you think the landscape is changing, and what are you doing things differently to ensure success in this space?
... Sure. So, and I think it might be worthwhile, and we have spent a fair amount of time thinking as to, you know, why some of the other companies in the space might not have fared as well as, you know, one could have hoped. And to me, it comes down to sort of, you know, three important factors. You know, clinical profile or differentiation, capabilities, and scale. So and some of the companies in the space, you know, in the space have been running sort of, you know, clinical trials that effectively establish their products as being me-too products.
And it's, you know, it's difficult to compete with relatively cheap generics, you know, when you have a much more expensive product that, you know, is not clinically proven to be differentiated, especially against the backdrop of stewardship concerns. Secondly, you know, the capabilities point is very important. A few companies have tried to transition from being sort of an R&D company to being a commercial company, which just takes a lot of different capabilities, even beyond capital. And, you know, as somebody who is sort of operating a commercial business, but also has very significant R&D component to what we are doing, I know how challenging that can be.
Last but not the least, I think that scale is particularly important in this space, especially given that the ramp-up of products in the hospital channel can be somewhat slower than in other channels. So I think that we have been able to, in our business, we have managed to sort of, you know, to avoid or handle these issues. For instance, you know, as I mentioned, XACDURO is in many ways, one could think about it almost as a rare disease product, in that you would use it for the right, you know, for the right patient. There, you know, for, I think that, you know, for carbapenem-resistant Acinetobacter patient, it is actually a first-line therapy.
You know, recent treatment guidelines, you know, effectively said so. I think we have enough scale in our portfolio to have a very clear path to profitability, and yeah. And so it's a business that structurally is, I think, well positioned to succeed.
Maybe one more. You mentioned your investment in this company called Armata.
Mm-hmm.
So within this pipeline, which asset are you most excited about?
So I would probably hesitate to be, you know, to speak specifically about Armata, given that it's sort of an independent public company. One thing I would say is I believe that Armata has a best-in-class bacteriophage platform and very differentiated manufacturing capabilities. And what's interesting is that, you know, phages is a fairly de-risked modality in that it has been used globally, but perhaps not as much in the United States for, you know, for decades and decades. And, you know, I think that there is a very significant potential to, you know, to phages as a treatment modality, and Armata, you know, is as well positioned as anyone to try to kind of, you know, to try to crack that market.
Wayne, I think I saw that you raised your hand. You have a question? Oh, Sarah, go ahead.
Thanks. Can you remind us of the new guidelines from the CDC and the SIS that could potentially relate to your products, and how you think that's gonna affect the sales in the future, and when you'll see that effect?
Mm-hmm. That's, that's an excellent question. So yes, guidelines are very, very important, very, very important in our markets. So we got very positive guideline updates for both XACDURO and XERAVA, kind of, you know, a few weeks ago, and I think that we are already seeing sort of, you know, some traction, you know, when our salespeople talk to physicians and, you know, when we interact with key opinion leaders at conferences and whatnot. We also have, you know, fairly high hopes for GIAPREZA to be included in updated guidelines, you know, which might come out, you know, say, at some point next year. And w e think that that would also be sort of a very meaningful boost to, you know, to awareness and also utilization.
Any other questions? Okay, we're almost out of time here, but I do wanna ask you before we close, what are the key catalysts that we're looking for over the next twelve months?
An excellent question. So a few different things. One, I think that we are anticipating to file, you know, Zoliflodacin with the FDA early next year. And, you know, we are very excited about the commercial opportunity of this product, both in the US and, you know, and globally, as we noted. And then, you know, we think that, you know, watching sort of XACDURO launch, but also performance of other products would actually be quite interesting. And then we also have some catalysts in some of our strategic healthcare assets, which kind of, you know, could also create a lot of value for our shareholders.
Okay, great. Thank you very much. Really appreciate you having here, and thank you-