Thank you, everyone, for joining us today. My name is Jason Jun. I'm the Managing Director as part of Citi's Healthcare Investment Banking team. Here with us today, I've got Pavel Raifeld joining us for the fireside chat, CEO of Innoviva. And why don't we just kick off? Pavel, great to see you here in Miami. Why don't I ask you to briefly introduce yourself, provide some background, as well as a high-level overview of the company?
Perfect. Hi, Jason. Thank you very much. It's really a pleasure to be here, especially given the weather. So my name is Pavel Raifeld. I've been leading Innoviva for the past few years. And my background in general is in strategy and finance. Over my tenure with Innoviva, the company has evolved quite a bit. We started out as a company set to maximize the value of royalties of a respiratory portfolio partnered with GSK. And given the success of this portfolio, we have become highly profitable. And so we evolved to really focus a lot on capital allocation and making sure that we can create long-term shareholder value. And so as a part of that effort, we have made a number of capital allocation decisions or investments that have made us into a much more diversified company right now. So currently, we have three business segments.
The first one, which still accounts for a bulk of our value, is the royalty segment, and currently, it's a very stable, resilient portfolio, delivering us approximately $250 million of revenue a year, and we expect that to continue for years to come. Secondly, we have also built what I believe to be sort of a top hospital business that currently has three marketed products and a pipeline, delivering just under $100 million of revenue, and we're very excited about the growth opportunities there, and last but not the least, we also have a strategic healthcare portfolio, which is valued on our books at over $500 million, and it includes a number of assets, which I believe have a very beneficial risk-reward profile and could be very meaningful value drivers for the company for years to come.
Super helpful. Thank you for that. I guess those are three quite interesting but relatively disparate parts of your business. And perhaps you can share a little bit more about the history of Innoviva and how the company all came together as a company stands today?
Of course. So a few years ago, when I joined Innoviva, I realized that whenever capital is your primary resource, how you deploy capital is a very meaningful way to generate value. And we thought that if we were to focus our capital on supporting innovation in areas of high unmet medical need, we would be able to deliver strong value. And in particular, we focused on areas which some might consider to be a bit contrarian, such as infectious disease and hospital space, where we thought that with our capital, we could both deliver greater impact, but also we felt that the very significant unmet medical need would ultimately enable us to build a business with very significant commercial promise. And so over time, we have made a number of investments.
A couple of years ago, we actually took privately a couple of companies, one called Entasis, which had a very strong R&D platform that we felt was producing differentiated assets in the infectious disease space, and then as we're thinking about how to commercialize the lead program, we also acquired a company called La Jolla, which had a couple of marketed products and a very strong and tight commercial platform, and so the combination of those assets resulted in Innoviva's Specialty Therapeutics, our operating hospital platform, and then we also made a number of investments where we own stakes in companies in other areas as well.
No, that's very helpful and quite unique. And I guess now at this point, Innoviva has had this business model for a number of quarters. And there's been some nice progress that the company has made across all three businesses. If you wouldn't mind just giving us a quick update on the most recent quarter, year-to-date performance, and share with us some of the highlights?
Perfect. So I think that our most recent quarter was very, very strong. And the business has been performing well across all fronts. So the royalty portfolio was, I think, has outperformed consensus expectations again. And it actually delivered year-on-year growth, which is, I think, impressive for a fairly mature portfolio. And I think that it's on track to have a very successful year. The operating business, IST, has delivered another very successful quarter of growth, which I think also showed, which was kind of the last, which capped the first full year of launch for XACDURO. And we think that the XACDURO launch has been progressing very well and frankly exceeded our expectations. And we also expect great things to come from that product.
And last but not the least, we've also witnessed significant operational progress across some of the assets in the strategic healthcare assets, part of our business, notably Armata and Gate Neurosciences. And we think that those companies are well positioned to deliver meaningful sort of clinical catalysts over the course of the next 6 months- 12 months.
Yeah. No, that's great. And I think we've seen plenty of examples where being a meaningful shareholder in portfolio companies for publicly traded biotech companies can be meaningful value creation at the parent level. So that's exciting. Why don't we talk a little bit about the IST business? That is obviously the business where you are commercializing yourselves. You have a field force, and you have a multi-product portfolio. We've seen some nice performance, some nice growth across the portfolio. What do you think are some of the key drivers that are sort of helping you really push the business forward?
I mean, I think what it comes down to is that IST is a fully integrated operating business. We have multiple capabilities embedded within the business across commercial, clinical, medical, regulatory manufacturing, and others. If you think about the performance of the business recently, it's been driven primarily by two assets, GIAPREZA, which is a legacy La Jolla product that has been performing very well following better resourcing of the product on our end, plus XACDURO, our new launch. I think that XACDURO, in particular, showcased that there is a lot of opportunity, even in a fairly complex hospital business for a differentiated asset that's addressing an area of very high unmet need. I think that opportunity is emphasized by the recent inclusion of XACDURO as the top choice for carbapenem-resistant Acinetobacter infections in the guidelines.
We're also very proud that XACDURO was nominated for the Galien Prize as the best biotechnology product, which is a big honor and something quite impressive for a company of our size.
Especially not having been on the market for that long?
Yes.
Yeah. I guess taking a step back, that's very helpful. But what is some of the Innoviva IST business's secret sauce in creating momentum to become a successful infectious disease franchise? Because that's arguably been a very challenging setting for most other biotech companies to be successful. Many have tried and failed. But early innings, you guys are making some nice progress. So what is it that you guys are doing differently?
Sure. That's a great question. And when we were contemplating initial investments in the infectious disease space, we spent quite a bit of time thinking about the competitive landscape and whether there were any learnings from some of the other companies in the space. And for me, there were a couple of different reasons for why some of the companies had been less successful than one would have hoped for. The first one related to asset differentiation. It's very challenging to sell a me-too asset in the competitive space against the backdrop of very cheap generics. And secondly, I think it's related to sort of building out commercial capabilities, which is inherently sort of quite challenging for an R&D company.
And then last but not the least, I think that there were structural issues in an environment where in a hospital environment where the revenue ramp is relatively gradual. It's difficult to be a profitable single-product company. And so we think that our strategy has kind of addressed all of those issues. We focus on differentiated products like Xacduro. And we find that commercializing such products is much easier. Secondly, we managed. We were very focused in terms of buying and enhancing commercial capabilities that we needed and very purposeful about that. And last but not the least, we actually have a portfolio of multiple assets. We have three products on the market right now, plus a pipeline product. And we think that that structurally positions us to be a profitable, self-sustaining business, which is very important.
And how much does, I guess, some of the royalties business also help the company at the parent level from a stock perspective where you've got many early-stage growing commercial franchises sort of struggle through the early innings of launch, right? Because there's a lot of noise and there's a lot of volatility. You constantly need to raise capital to help fund and really turbocharge commercial. But I guess you've got the great position of being very well capitalized.
Exactly. And we think of that as a huge competitive advantage because our long-dated royalty streams allow us to also take a long-term perspective on the market and on operational performance. And we take most decisions with a long-term view in mind. And to your point, whereas some of the other companies have struggled in the markets and have experienced a very volatile ride, I think that our royalty portfolio provides us with some insulation and allows us to really generate long-term value across all parts of our business.
I guess just switching gears just a little bit. I guess two questions on IST. One is, how big ultimately do you think the existing portfolio can get from a size addressable market perspective? How should we think about the commercial potential of IST? And also, obviously, the company has been very capital efficient and disciplined. So how do we think about path to profitability for the IST franchise?
Sure. Excellent questions. If we look at different products within the IST portfolio, I might start with XACDURO. I think that analysts, generally speaking, think of it as a couple of hundred million dollar product, which I think is fair with some upside potential. I think that the legacy La Jolla portfolio, GIAPREZA and XERAVA, has been growing very nicely in our hands since we managed to sort of better resource and re-energize those products. I think they could perhaps double or more. Then the pipeline product, zoliflodacin, which we expect to file with the FDA in short order, has perhaps the biggest commercial opportunity of all.
We think that the market for a novel treatment, a novel oral treatment in gonorrhea, has perhaps commercial opportunity of $500 million in the U.S., which we are quite excited about because it's a very, we haven't really talked much about it here, but gonorrhea is a very sizable disease from the patient population perspective. There is a significant need for an oral treatment in this space. Even more importantly, when resistance concerns are going to make the current standard of care less potent, I believe that zoliflodacin, our product, is very well positioned to become the new standard of care.
So that sounds like a very, potentially very large, meaningful addition to the IST franchise upon approval. I guess thinking about IST beyond the NDA, beyond zoliflodacin, I would say that right now, curious to hear your views on the landscape across infectious disease, how do you think about opportunities to grow beyond the existing portfolio? Right. Obviously, you've executed some nice BD and M&A deals. But I guess what is the strategy of outside of organic growth of the portfolio, BD, M&A, obviously the La Jolla and Entasis acquisitions? Is that the right way for us to think about how Innoviva thinks about growing the business going forward?
Sure. That's a fantastic question and one that I ask myself on a daily basis. So maybe I could just point out a few buckets because given sort of the different parts of the business, the inorganic growth implications also differ a bit. So I think that from the capital allocation perspective, we have proven over the past quarters that IST platform is a very credible platform. And I think that if we put other products onto the platform, they would perform well. Right now, we're seen as one of the top pure-play hospital companies in the space and in the critical care infectious disease space. And I think that most opportunities sort of come across my desk. And we currently see a number of interesting opportunities at attractive valuations.
And so we're going to pursue some of those opportunities, but we're going to remain very disciplined about how much capital we commit and all the rest of it. We also see opportunities to grow the strategic healthcare assets, part of our business. There are a couple of interesting companies within the portfolio, such as Gate, where we have committed capital in the past and might commit more capital. And we think that that could also be a very meaningful leg of growth. And finally, last but not the least, we view ourselves as a shareholder-friendly company. And capital return to shareholders is also something that we have considered in the past. For instance, earlier this year, we completed a $100 million share buyback program, which I think was economically accretive to us and our shareholders. And we're always thinking about opportunities like that as well.
And then just maybe on BD strategy, it sounds like you get plenty of opportunities to look at within the IST sort of remit. Obviously, there are other areas within therapeutics that might be available to you. Is that something that you think about? Perhaps looking to diversify beyond IST, or for the time being, is it really sort of focusing in on IST?
I think it's both. We definitely look at opportunities within IST, but we are within the IST area of operation because those could be quite serious because there could be multiple synergies to be unlocked, but having said that, we have also looked very closely at opportunities in other areas. Once again, to give an example, one of the assets within our strategic healthcare portfolio is a psychiatry and a very precision, frankly, neuroscience company called Gate, which is currently running a phase two trial in depression, and we think that that's a very interesting asset with a symmetric risk-reward payoff, and so there are multiple things of that sort which we have contemplated. But as always, we try to be very thoughtful and disciplined as to how we manage risk, to how we allocate capital.
We focus on opportunities where we think we have differentiated assets that are likely to be successful in addressing some meaningful and mathematical need.
No, makes a lot of sense. And I guess maybe switching gears a little bit, I want to talk about the royalties. Obviously, this is a part of your business where obviously you receive royalty revenues. And I think from all our discussions, it's an important part of the business from a capital standpoint in particular. If you wouldn't mind just sharing a quick overview on the royalties in terms of the scale, the longevity of the royalties, and your relationship with GSK?
Yes. It's a part of our business that is very near and dear to my heart and also a very valuable part of our business. So currently, we're receiving royalties of two products commercialized by GSK called Breo and Anoro. These products are part of the GSK respiratory portfolio being used for asthma and COPD. Over years, and I have seen these royalties over the last four or five years, they have proven to be remarkably resilient and have performed very well. And I think, I mean, not to say the secret sauce there, but these are very well-known and very well-liked products. There is very significant following among patients and physicians, which I think is driving and market shares in this space are relatively stable.
Because if a patient, if an asthma or COPD patient is well-controlled by a given product, both patients and physicians are hesitant to switch it up. And if you look at innovation in the space, most of it focuses on severe patients, whereas Breo and Anoro, generally speaking, are sort of used by mild and moderate patients. And so we think that we think that the revenue stream there is quite stable. By the way, one important thing to note is that the majority of the revenues are coming from ex-U.S. markets, which are both less competitive and, in fact, happen to have sort of pretty meaningful pockets of growth. And this is a very durable franchise. In our corporate presentation, we lay out the patent estate, but we think that it is very broad and it provides us with a very meaningful protection across both of those products.
And then last but not the least, these products have outperformed consensus expectation time and time again. And they have performed very well in as disruptive an environment as COVID. And so I have very high hopes for them.
And I guess based on what you see recently with your respiratory royalty portfolio, any recent trends that we should be aware of? Obviously, there is some continued sort of nice stability/growth. Anything else that you'd like to share?
No, except for the fact, I mean, if you look at the last quarter, it just underscored my point about the stability and resilience of these royalties, given that they achieved year-on-year growth in Q3 of this year. It's just an excellent business, and we're thankful for GSK for being such good commercial partners for us.
Great. That's great to hear. Okay. Just thinking ahead, I guess, into 2025, obviously outside of commercial execution, what else should we be focused on? What else should we be paying attention to in the way of catalysts and meaningful value inflection points?
Sure. So I think I would anticipate us filing with the FDA for zoliflodacin, which I think is going to be sort of would get us closer to getting this important product to market. There is likely to be an update for sepsis guidelines, which might be highly relevant for GIAPREZA. There is also an opportunity for some inorganic growth within the IST portfolio. And then, quite importantly, there are also some milestones coming up from our strategic healthcare assets portfolio. So, for instance, Armata, the bacteriophage company that we have provided some capital to, is running two phase two clinical trials that are likely to read out in the next six months. And if successful, they're going to be quite validating for the platform overall, but also pave way for pivotal clinical trials in important indications.
No, that sounds like a lot of exciting things to look forward to in 2025. Perhaps one of the last questions that I had was Innoviva is such an interesting business where, again, the way that you describe the three different parts, it's very unique. I guess, how do you think more long-term beyond 2025 in terms of building the business, the growth? I guess, what is the long-term vision that you have for the company?
Sure. That's an excellent question. I think that our diversification actually provides us with some benefits. But ultimately, what I think will happen is we have a successful, high-growth operating business, and we expect the business to expand further and grow based on a combination of organic and inorganic growth. And then we would expect some of the bets we have made through the strategic healthcare assets portion of our business to also sort of pay out and provide us with a very significant other part of our business. And overall, I would expect that in the next five years or so, we're going to be a very profitable, high-growth company anchored around the IST business, but with very significant presence in other areas as well.
No, great. That's super helpful and exciting to think about all the different ways that the company and the optionality and the growth ahead of the company. So great. So I think that's really about it for today. So thank you, Pavel, for joining us today and for our conference in Miami. And we look forward to seeing more on Innoviva's progress going forward.
Perfect. Jason, thank you very much.
Great. Thank you.
It's a real pleasure to be here.
Thanks.