Great. We're just about at time, so let's get started. Next presentation is with Innoviva. I'm very pleased to welcome Pavel Raifeld, CEO. My name is Asad Haider. I'm the U.S. Pharma analyst here at Goldman Sachs. Pavel, welcome. Thanks for being with us.
Yeah, thank you very much. It's really a pleasure to be here.
Great to have you. Maybe, Pavel, just to start off, you could provide us with a bit of a brief evolution of the company and the three copilots that you talk about in any high-level framing comments that you want to introduce with.
Sure. Thank you. We're very excited about Innoviva. It's always happy to share the story. Originally, we were formed to manage royalties on some respiratory products that we co-developed with and then licensed out to GSK. They're currently being commercialized by GSK. As these products have become very successful over time, right now, these are some of the most widely used therapies for asthma and COPD. As these products have become very successful, the royalty revenues that we have been receiving started being quite meaningful. We decided to deploy the cash flows in order to build out other areas and create some shareholder value through intelligent capital allocation. Right now, fast forward a few years, we have three business segments. The first one is the royalty business segment.
We're still getting royalties from two products called Breo and Anoro that historically have amounted to approximately $250 million a year. We expect that to continue on going forward for a fairly extended period of time. Secondly, over the last couple of years, we also built out an infectious disease and critical care franchise that has delivered over $100 million of revenue last year and is growing at 50%+ per year. We expect very significant growth from this business on a going forward basis. Last but not the least, we have a strategic healthcare asset portfolio valued at approximately $500 million. This is a portfolio of stakes in companies where we think there is very asymmetric risk-reward payoff and promise both in terms of addressing significant unmet medical needs, but also generating meaningful revenues.
The way you're describing it, Pavel, your business is part financial asset-oriented and also part product-oriented. Maybe just talk through why you like having this kind of a balance.
To me, it comes down to two things. The first one is, I think, the downside protection and the upside opportunity that's embedded in the business. I think that the royalty portfolio is a portfolio of well-known, well-characterized products that both provide us with very significant downside protection, but also through recurring cash flows makes us masters of our own destiny. I think that the other two parts of the business, the operating platform and the strategic asset portfolio, provide us with very meaningful sources of growth and upside. To me, it's just a very comfortable situation to be in across a range of market environments, including an environment as perhaps unusual and disruptive as the current one.
I mean, speaking to that point, the environment is indeed unusual and disruptive, and it's been a theme throughout the healthcare conferences, as you can imagine. Maybe before we dive into each of the segments, how is the external environment, and particularly policy topics, pricing, tariffs, regulatory impacting your business?
That's a great question. As all of our peers, we also spend a lot of time trying to think through the implications of both things that are being discussed and things that might be discussed on a going forward basis. In general, I think we're actually very well positioned. Through the nature of our business, largely insulated from a lot of the pressures. We do n't think that there is major regulatory risk to what we are doing, given the stage at which most of our products are. We actually feel that under a fairly wide range of tariff scenarios, we are going to have gross margins which are going to be supportive of significant value creation for our shareholders. All in, we feel like we can operate robustly in this environment.
In fact, we think that this environment creates a lot of dislocations that we might take advantage of. Because in some ways, we are an operating company. Arguably, those assets should increase in value in risk-on environments. I think that in risk-on we also are deploying capital. In risk-off environments, there are more opportunities for us to deploy capital at attractive price points. That is a lot of what we are seeing right now.
All right. Let's move on and let's start double-clicking on some of the business segments. I want to start with your royalty assets, Breo and Anoro. Maybe just characterize the underlying products, the difference between the two, and the markets that they serve.
Sure. That's a great question. These products are very dear and near to my heart. So Breo is a first ICS/LABA product that's extremely well-known, very widely used. And it has delivered about $1.4 billion of revenue last year. Anoro is a best-in-class LABA/LAMA product, also extremely well-known, extremely widely used, and that delivered about $0.7 billion of net revenue last year. In general, we think that these products have a lot of durability to them. We do not anticipate meaningful new competitors emerging. Also, these are maintenance therapies. In many ways, once a patient is on one of these products, to the extent they're well controlled, there really is almost no incentive for the patient or for the physician to make any changes. In that way, the products are quite sticky. We've seen that through our numbers over the last years.
What about differences between U.S. and non-U.S. markets for those products?
That's actually a great point. These are also very well-diversified products. About two-thirds of revenue is delivered in ex-U.S. markets and one-third of revenue in the U.S. market.
Two-thirds, one-third?
Yes. What I like about ex-U.S. markets is, I mean, first of all, it's a large amalgamation of markets. There is significant embedded diversification there. Secondly, we actually see pretty meaningful pockets of growth in those markets. Also, typically, you don't see some of the pricing or access challenges that have affected the U.S. market over several years. I think having this global royalty revenue base is very attractive. This is what enables the stability of the portfolio.
GSK is the marketer for both, right? I guess how do they prioritize? How important are these products to them in the context? I mean, obviously, in the context of the broader portfolio, I can tell. But just generally, how do they view these products?
I think these are pretty important products for them. If you think about it, respiratory is one of their core areas of expertise. GSK has been quite focused there. These two products in particular have been delivering to GSK over $2 billion of revenue a year. Clearly, they're paying a lot of attention to these products. In our engagement with GSK, they tend to be constructive and quite focused. What I think is quite important is because these are maintenance therapies, active promotion or active commercial involvement is actually less important for these products than for certain other commercial products. I believe that even if GSK priorities were to change over at some point in the coming years, these products would still enjoy very meaningful durability.
I guess just in terms of where are these products in their life cycle, maybe talk to us about the IP protection and competitive barriers. I guess how long can Innoviva expect the royalty revenues on these to last?
All great questions. We spend a lot of, given the importance of these assets for our portfolio, we spend quite a bit of time thinking about that. There is a pretty broad collection of primary and secondary patents covering these products, which would point you to exclusivity into the 2030s in the U.S. and actually ex-U.S. I mean, obviously, each market has separate LOE dates. Overall, you probably could get another couple of years of exclusivity. These are fairly long-dated products. What I think is also quite important is that these are drug-device combinations that are very difficult, where there are very meaningful hurdles to replicating. These are both regulatory hurdles and manufacturing. We know that for similar products in the past, it has been very challenging for generics to enter.
We feel that across the IP, manufacturing, and regulatory challenges, there is actually a very strong moat around these products.
Got it. All right. Maybe we can move on to specialty therapeutics and critical care and the infectious disease platform. Maybe just start by giving us a brief introduction to the product portfolio and the pipeline in that segment.
Yeah, happy to. We formed our hospital business, we call it Innoviva Specialty Therapeutics, or IST, a couple of years ago through acquisition of a couple of companies in the infectious disease and critical care space. Our underlying thesis there was that there is a tremendous unmet medical need in the space. Unfortunately, in many instances, that did not translate into commercial opportunity, partially because large pharma were not as enthused about the space. Smaller biotechs actually had to take these products to market themselves, which can be challenging. We thought that if you were to select differentiated products and build a scalable commercial platform, you could actually deliver very significant revenue and profitability from that particular portfolio. This is exactly what we have tried to do with IST. I believe we've been quite successful at that.
Right now, we have four products on the market. Three of them are infectious disease products, and one of them is a critical care product. There is very significant growth embedded in this portfolio. As I mentioned, in the U.S., we've been delivering over 50% growth over the last couple of years per year. I think that there is a tremendous opportunity for more. For instance, just a couple of weeks ago, we made our latest infectious disease product called Zevtera commercially available in the United States. We expect that with the launch, that will further accelerate our revenue trajectory.
Got it. I guess maybe digging into that a little bit further, what are the dynamics of the critical care and infectious disease market that you think make this a particularly attractive opportunity for you?
I think it's a couple of different things. I think that there is very significant unmet medical need in the space. Yet, there are relatively few credible commercial platforms in the space, as I think some of the larger players have decided to focus on other areas. I think that for a good commercial platform, and I believe that we managed to build a best-in-class commercial platform in the hospital space, there is just tremendous opportunity to both advance and grow revenue in existing assets as well as attract or in-license other assets. To me, we are getting the tailwinds from this relatively low degree of competition and strong commercial execution. Resistance is also increasingly becoming a concern. We think that they can also meaningfully drive the revenue opportunity for us.
Last but not the least, I think that public funding might ultimately become available. I think that the governments across the world, including the one in the U.S., are becoming increasingly concerned about the resistance. I think to the extent there are any programs or any funding available to the space, we are probably going to be one of the most logical potential beneficiaries.
Let's put some numbers around that and quantify what you see as a scale of the revenue today and where that evolves to. Can you give us a sense of peak sales opportunities here?
That's a great question. Last year, we generated around $117 million of revenues, including product sales and short milestones from this portfolio. This is a young portfolio. We think that there is a very sizable opportunity across the business. I think that the peak revenue opportunity for the portfolio is probably well in excess of $500 million. This does not include potential for inorganic growth. We think that the potential for inorganic growth is exceptional simply because there are so many companies which are developing interesting products in the space. There are relatively few companies with strong commercial expertise. We are one of them.
I guess on that $500 million, have you talked through your $170 million today? You said have you set high-level framing on timeframe of that and when you think that could get captured?
We could probably capture a lot of that. I mean, these are peak sales. We have not publicly spoken about those numbers. I think we could potentially get there early in the 2030s.
How much of that is dependent on your point of organic versus inorganic growth?
I think this would be largely organic.
Largely organic. Anything on top, anything inorganic could be incremental to that opportunity?
Yeah. We have been quite active.
You have?
Yeah, in terms of exploring inorganic opportunities. As I mentioned, just at the end of last year, we in-licensed a product called Zevtera from a Swiss company called Basilea, which is used for Staph aureus bacteremia as well as certain other indications. We think that that's a wonderful product. We just made it commercially available in the United States. We think that it could be a meaningful growth driver for us. Equally, I think that we're also exploring some other opportunities which might be a good fit with our commercial platform.
Maybe just go deeper into that point. Do you envision going deeper into that area or building out in other therapeutic areas in this segment?
I think it's both. I think that we have a lot of expertise in the hospital channel. We certainly know infectious disease and critical care space especially well. Those are very much our sweet spots. Having said that, there are also adjacencies, other therapeutic areas where commercialization would still rely on our existing call points. We would be very interested in products in those areas as well.
Got it. And then maybe we can, and thank you for that comprehensive overview, maybe finally just moving to the strategic healthcare assets part of the business. Again, same question. Just describe the key investments in your portfolio and how do these investments come about and how do they differ from one another?
Excellent. The thinking behind our strategic healthcare assets portfolio is we're looking for opportunities where we can address for companies which have significant commercial promise and which can deliver us strong, superior risk-adjusted returns. I would probably point you to a couple of companies that are quite prominent in their portfolio. One is a company called Syndeo. Syndeo is a neuroscience company which is based off a platform focused on synaptic health that was founded by a Nobel Prize-winning scientist and leverages a lot of his proprietary insights. Right now, they also have a couple of products in the clinic. The lead product is in phase II trials right now in depression, which is going to read out next year.
I think that this is a really interesting opportunity for us because if the product succeeds, this is going to be a very meaningful value inflection point both for Syndeo but also for Innoviva at large.
Depression is quite a crowded area, though. What's the mechanism? I don't know. I'm not familiar with this product.
Yeah, it's an [Antimioc] receptor positive allosteric modulator. It's a part of this family of compounds called stenels.
Got it. Keep going. Yeah.
Yeah, sorry. They also have some other follow-on compounds which could actually be quite interesting. The second product or the second company that we have pretty meaningful economic exposure to is a company called Armata, which is a publicly traded company which is a bacteriophage specialist. They just a couple of weeks ago announced phase two clinical data in Staph aureus bacteremia that is groundbreaking and just very compelling. We think that that both validates the opportunity in this specific indication, but it's also a good confirmation of the overall platform that they had. To me, that's also a very interesting company in our portfolio.
I guess what's the longer-term strategy for realizing the value from these investments? I mean, how is Innoviva and its shareholders? How are they positioned to benefit from these?
I think in two ways. We have very meaningful economic exposure to these assets. I think to the extent they are successful and they create shareholder value, we are going to be a very strong beneficiary of that. There also might be some strategic overlays in the future. All in, we think that if there is value to be created, we are going to be a significant beneficiary.
Maybe just then going back to the earlier question on the external environment, how is the macro environment? How has that impacted the outlook or operations in here? What are the kinds of risks that you're monitoring when you make these investments?
We always look at we have a very detailed approach to reviewing investments. And we always think about system-wide risks, so to speak. Overall, I do not think that the macroeconomic environment has really affected these companies that much, except that the fundraising environment might have tightened a little bit for early-stage companies. I think that given that we are fairly well capitalized, this actually creates opportunities for us from the capital deployment perspective.
Got it.
Overall, we feel that the current environment, while we would certainly hope for a stronger and better environment, we're quite comfortable operating in the current one.
I guess of these assets, Pavel, which is the most material for the growth potential of the company?
Of the strategic healthcare assets?
Yeah.
They have somewhat different risk profiles. I would say that both are equally important. I'm quite excited about the neuroscience platform, which is probably our more recent investment because I think that it has potential for blockbuster products coming out of it. Both of these, I think, present very interesting and somewhat different opportunities.
Are there synergies with these assets and other parts of the business?
Right now, these companies are run as standalone companies. However, having said that, there is a fair amount of expertise and network sharing going on. We think that we can deliver some incremental value to these companies.
Okay. Let's maybe move on to the balance sheet and just your overall financial position. How are you thinking about capital structure and future allocation and deployment?
That's a great question. Given my background as an investor and a banker, I spent, I and also our CFO, Steve Basso, spent a lot of time thinking about these matters. When we think about capital allocation, we think about two general uses of capital. One is capital structure, you debit, share, et cetera. The second one is strategic investment. In general, we try to be fairly conservative and disciplined with our capital structure. In general, we believe that a cash flow positive company may return capital to shareholders. We completed a $100 million share buyback program in the past. We've been very pleased with how that went. The other part of our business or our capital allocation approach is strategic investments.
In the current market environment, we see a ton of really interesting opportunities both across our operating hospital business as well as the strategic healthcare asset portfolio. We are also quite focused on exploring opportunities in those areas because we think that we can really accelerate growth and profitability of our business and also create some shareholder value.
As you think through the forward strategy, which parts of the business are you most focused on building out?
It's sort of like which of your kids do you like the most?
That's the right question.
It is. I think it's both. No, no. In a slightly different fashion. I think that for the hospital business, it's an operating business. It has a fantastic.
I have three kids, by the way, so I have a harder job. If you could answer that question. Keep going. Sorry to interrupt.
Yeah. No. I think that this business, I think that our ISP business has tremendous growth profile on a standalone basis. A couple of years ago, we only had two products on the market. Then about a year and a half ago, we launched the third product. We're just launching the fourth product. With any luck, we could get another product approval around year end. I think that this is a wonderful business by itself. Having said that, we think that there are a lot of really differentiated products that can be commercialized using our platform. In many ways, we feel like it would be very good both for our shareholders but important for the patients to make these products available and to enhance access. I would anticipate us continuing to commit capital to that business because it's such a productive platform.
Equally, the strategic healthcare asset portfolio also has some really interesting and unique opportunities for us to put more capital to work. We also look forward to that.
Do you think is there anything else with respect to your BD assets that we should be talking about?
I mean, I think that those are the two prongs of our BD assets. I think in general, and maybe going back, in general, a lot of these strategic processes are very difficult to predict in general. We also try to be very disciplined in terms of how and when we invest. We do not really have, so that is why it is difficult for me to say that we are going to do more acquisitions on this or that side of the house because there is so much uncertainty involved. Right now is a fairly good environment to deploy capital. I would expect us to be both active but at the same time remain disciplined and thoughtful about what we are doing and how much risk we are taking on.
Maybe we just have a few minutes left. Maybe we can touch on, Pavel, some of the key events coming up, whatever time frame that you are most focused on or shareholders would be most focused on. I guess what are the important catalysts that we should be tracking from here?
That's a great question. Aside from things strategic, I think that we just made our fourth commercial product, Zevtera, commercially available in the United States. I think that the product's launch is going to be interesting to watch. I would anticipate continued strong commercial delivery from the rest of our product portfolio. The last product in that bucket, zoliflodacin, has been on track from a regulatory perspective. We look forward to continued progress there and potential approval around year end.
Any last-minute thoughts? Are there any questions from the audience? Nick? The question just repeated was on pricing dynamics in the hospital market.
In our experience, pricing dynamics are actually quite constructive. I know that historically, people have been very concerned about those. In our experience, if you have a differentiated product, that's well recognized by hospitals.
Any parting words?
Yeah. I think this is as exciting a time as any for Innoviva. I think that our business is firing across a lot of cylinders. I think that in a couple of areas like ISP, our operating business, like some of our strategic healthcare assets, we are actually approaching or at an inflection point. We are quite excited about what the future might hold. We also think that we present a very unique opportunity given some of the downside protection that we think is embedded in our business and yet a tremendous amount of upside that we are also seeing there. I am very excited.
Great. It definitely is a very unique business model. Thank you, Pavel, for your time. Thank you for coming. We're just about out of time, so appreciate your participation.
Thank you so much. It's really a pleasure to be here. Thank you.
Thank you.