Good morning, everyone. Thank you for joining us for the next session of the Barclays Healthcare Conference. I'm delighted to have Pavel Raifeld, the CEO of Innoviva, with us. Pavel, it's great to have you. Thank you for joining us. Maybe to kickstart the proceedings, could you maybe start with some opening remarks around the business and the outlook as you see, and we could dig into some of the questions?
Of course. Thank you very much. It is really a pleasure to be here. Innoviva is a very interesting company, which I am very proud of. We started as a company, and we were initially formed to manage royalty revenues of some products that we developed with and then licensed to GSK. As these products have become very sizable from the revenue perspective, we started receiving very sizable royalties and have become a very profitable company. A very significant question for us was, how can we creatively deploy the capital available to us to create value for shareholders? We started to make very meaningful investments in areas of high unmet medical need that we thought would actually be very value creative in the long run.
Perhaps the biggest of these investments is a platform in the infectious disease and critical care therapeutic space that I think has seen become sort of one of the leading players in the space. Right now, Innoviva is composed of effectively three different businesses. The first one is still our royalty business. This business, last year, we received just over a quarter billion dollars in royalty revenues. Consensus estimates forecast about over $1 billion of royalty revenues to us over the course of the next five years. It is a very valuable and important part of our business. The second part is this infectious disease and hospital therapeutics platform that last year delivered over $100 million of revenue, essentially doubling from the year before. We have also been very proud in terms of how it expanded and expect great things from it.
Last but not the least, we also have a portfolio of strategic healthcare assets, which are effectively stakes in companies that have very significant promise and, I believe, asymmetric risk-reward profile. These have been valued at over $0.5 billion. I think that the collection of these assets really creates multiple opportunities for us to create value while also offering a lot of the downside protection. Very happy to elaborate on.
Yeah, absolutely. Great. For the sake of full disclosure, it's a company we do not cover, but the business model looks very interesting, pretty different from quite a few of the companies that we look at and cover. Maybe starting with the royalties business, I clearly said that $250 million going towards $1 billion . Can you just discuss what drives this and what are the underlying assets that drive this and the expectations for this segment over the next five years?
Sure. Yes. We're getting royalties off two of the most commonly used asthma and COPD assets commercialized by our partner, GSK. They are called BREO or RELVAR ex-U.S., and then also ANORO. These are extremely well-known, well-characterized assets. If you know any people suffering from those two respiratory conditions, chances are they or some of their friends are using those drugs. These drugs have been known for a long time, and both patients and physicians like them. There is very significant stickiness embedded in these therapies. Also, these are maintenance therapies, which effectively means that people are less likely to switch them, even if there are generic entrants or perhaps some new treatments. Secondly, the bulk of revenues for these products is coming from ex-U.S. markets, where you still have very significant growth. There are meaningful pockets of growth in some of those markets.
We're quite excited about the resilience of these products in environments as disruptive as, let's say, the pandemic more recently. Last but not least, both of these products enjoy very meaningful IP protection, which can extend into 2030 and beyond. On top of that, this is a space where historically, generics have found it very difficult to enter, even after a lot of the IP was gone. We're quite comfortable with the competitive moat around our products. We think that some of the consensus estimates might actually not do full justice to the resilience and durability of these products.
Understood. I mean, for what it's worth, I remember speaking to a very well-known respiratory company in India in 2007 who were planning to come out with a generic Symbicort in 2012. They got it out maybe 13 years later or 12 years later. I do hear you when you say that this is a very tough area for generic companies to launch products.
Exactly. The same happened with generic Advair. It's a recurring story because these are such complex drug-device combinations, both from a manufacturing perspective and then from the regulatory perspective as well.
Agree. Maybe shifting to the infectious disease side, it looks like last year was a great year for the business. Any key highlights that you want to call out and we could dig further into it?
Yes. Perhaps just to go back and sort of talk a little bit about why we decided to invest in this business. Historically, the infectious disease space, not historically, but over the last few years, this space has been unloved by some of the investors because there has been some value destruction in the space. We thought that the challenges that some of the companies face in the space could actually be opportunities if applied correctly. We have looked at how various companies have fared in the space. We thought that if you could focus on differentiated products, be almost hawkish from the fiscal discipline perspective, and make sure that you have scale, then you could actually build a sustainable, profitable business in the space, effectively doing a roll-up.
This is exactly what we have done with our business in the space, which we call Innoviva Specialty Therapeutics or IST. IST has been performing very well over the last year. The launch of our most recent product called ZEVTERA has been one of the most successful over the last several years. We continue to re-energize other products in the space. Right now, we have three products on the market. We managed to license another product with a near-perfect fit for our portfolio and then advance some of our pipeline. All in, a very exciting year for us with a lot of activity. We think that IST is really becoming into what we hoped and expected it to become.
Great. Very interesting. Could you tell us about the new product that you licensed and brought in and your expectations from it more broadly?
Yeah, of course. We're very excited about it. It's a product called ZEVTERA, which we licensed from a Swiss infectious disease specialist called Basilea. We think that this product is a very differentiated product that we were very lucky to be able to license for a relatively modest capital outlay. The product is very differentiated in a couple of different areas. We are most excited initially about its uses in MRSA bacteremia, where we think that it actually could be game-changing. We also think that it's also indicated for pneumonia and skin infections. We think that it could also be a quite meaningful addition to physicians' arsenal in those spaces as well. All in, we have high hopes. We expect to launch the product in the middle of this year. So far, everything has been progressing in line with our expectations.
Got it. Do you want to put out any longer-term goals around this product and what one should expect? Or is it too early still?
It might be a little too early to tell. One thing I would say is that some of the consensus estimates for Basilea were a couple of hundred million dollars. I think that we would need significantly less than that to make it a very economically creative product for us.
Got it. Understood. Maybe shifting onto the product. I know you have an NDA submission coming up for zoliflodacin. Give us an update around that. How should we think about the outlook for that particular product?
Thank you. Yes. zoliflodacin is our lead pipeline asset. All the NDA preparation is progressing in line with schedule. We've been very pleased with that process. We hope that by this time next year, we're going to have an approved product with zoliflodacin. In terms of the opportunity, I think that there are two ways to look at that. As a reminder, zoliflodacin is an orally available product for gonorrhea, which is a very important disease with meaningful unmet medical need. We think that in the first phase, zoliflodacin's oral delivery mechanism is actually going to be very differentiated compared to the current standard of care, which is a fairly painful injection. I think longer term, once resistance to the standard of care arrives to the United States, there is a good chance that zoliflodacin could become the next standard of care.
We are very excited about the opportunity there.
Got it. Lastly, maybe just to sum up the overview for the business, as we think about this for 2025 and the next couple of years, what are the top milestones that we should be looking forward to for the segment?
For IST, I would anticipate continued commercial delivery from our market products, XACDURO and XERAVA, and, of course, our new launch XACDURO. I would hope for a successful launch of ZEVTERA, the in-licensed product that we just discussed. I am also hoping for positive regulatory developments with zoliflodacin.
Got it. Understood. We look forward to that. We should do the best on those steps. Shifting finally to the final part of the business, the segment that you discussed around these strategic assets. Give us a bit more color around the nature of these portfolio of assets. How should the stakeholders, including investors, be thinking about these particular assets? What is most exciting about it?
Yes. It is a very exciting portfolio of assets. We selected them effectively with selecting assets with significant differentiation in areas of high unmet medical need. We think that assets in this portfolio hold significant promise, both from the product perspective and ultimately from the commercial perspective. One asset that I would probably want to mention here is Gate. It is a depression asset that is supported by some of the leading work on synapse biology that was led by a leading Nobel Prize-winning researcher in the space. They are currently running a phase two trial in depression. I think if successful, this could be a very meaningful inflection point for Gate, but also for our strategic healthcare asset portfolio in particular. We look forward to getting data.
Got it. Look forward to that. I think one of the things about a diverse business setup like yours is also investors' ability and time spent on understanding the business segments and the dynamics of each of these. When you speak to this, what are the key questions or pushbacks or concerns that you get around the overall business in terms of how you think the market has understood the business?
That's a great question. I mean, we do have a generally diverse business. I think that its diversity is actually its strength. If you think about the way our business is positioned, the royalty assets provide us with very significant cash flows and effectively shield us from a lot of the market volatility, which might be particularly relevant in times such as these. They also provide us with an opportunity to really deploy capital with a long-term vision. We don't cut corners. We invest to build long-term value. I think that both across IST and the strategic healthcare asset portfolio, there are multiple milestones there which enable us to create value. I agree that there are multiple sub-assets there. In some ways, I would view these as multiple option values or multiple opportunities to create value.
To me, a lot of what Innoviva is about is potential to really build something very meaningful. I think we've been making major inroads over the course of the past year with doing that. I think that this year has potential to be our best one to date.
Got it. As you said, the royalty assets is kind of almost, I would call it a cash flow shield for you. As you think about this with this strong cash position, capital allocation obviously becomes paramount. How are you thinking about capital allocation and the balance sheet over the next couple of years? How do you plan to orient or reorient it?
Sure. That's a great question. We are laser-focused on shareholder value creation. Capital allocation is something we spend a ton of time thinking. I'll probably split capital allocation into two buckets. The first one would be capital structure. The second one would be strategic investments. From the capital structure perspective, we have been quite active in returning capital to shareholders. Just last year, we completed a $100 million program. In general, this is one of the uses that might be meaningful for us over the coming years. In general, we spent a lot of time thinking about how we can optimize our capital structure to make sure that we enjoy the lowest cost of capital and that our shareholders get the most value.
On the strategic healthcare asset, on the strategic investments side, we see a lot of dislocations in current markets. We see multiple opportunities to deploy capital very accretively there. We also try to be very fiscally disciplined. We look at everything through a very risk-conscious lens. We think that we have been building a very productive platform with IST and with some of our strategic assets. I would anticipate us to be relatively active in continuing to deploy more capital there.
Got it. Maybe could I also squeeze in a question around, especially for structure like this, the contribution of the business development teams becomes very important in terms of going out to the right asset and everything else. How would you incentivize the team and ensure that as you think about capital allocation, it's geared towards both near-term returns and longer-term value accretion? How is the team incentivized?
I wouldn't say that structures are very much aligned with our long-term views. As I mentioned, we don't try to cut corners. We try to be very diligent in terms of how we look at investments. We try to be robust in our decision-making processes. We have very significant expertise in-house. Through our network, we also rely on a number of consultants to help us make better decisions. I think so far, we have been able to deploy capital in a value-created fashion. I would anticipate us doing that in the future as well.
Fantastic. Maybe the couple of minutes remaining would kind of leave it open to you to maybe bring about any key closing comments or topics that we did not touch upon. Maybe call out some important trends that you are seeing in the industry impacting or benefiting the company.
Thank you. I think that the current market environment, which is probably characterized by volatility and change, actually works quite well for a well-capitalized company like ourselves, which in some ways might be insulated from some of those market forces. We are very excited about the opportunity to support some of the companies that might be more impacted by external forces. We think that this is actually a very interesting time to look at opportunities for capital deployment. In terms of our overall business, I think that there are going to be very meaningful inflection points in different areas of the business. I hope that the royalty business will continue delivering in the way it has in the past. I would anticipate meaningful growth from our IST business. We started this year with three products on the market.
We could end the year with five products on the market, just to give a sense of the pace of change and expansion in that business. There are multiple milestones in our strategic healthcare assets, which we think would be very meaningful inflection points as well.
Great.
It is a very exciting time.
Absolutely. I wish you the best. Thank you for joining us at the conference. Pavel, it's a pleasure to have you on here. I wish you a very productive conference.
Thank you very much. Really appreciate it.