Hello everyone. Thanks for joining the Innoviva fireside chat. My name is Jason Ellis. I'm a Managing Director in our Biopharma Investment Banking Group, and I have here with me Austin Hackett, who is the VP of Business Development and Investor Relations at Innoviva. Great to have you with us.
Thanks, Jason. Very happy to be here, and thanks for having us.
Excellent. We'll just start off by going through some questions and digging a little more on the business. Maybe to get started, Innoviva has a very unique business model. For those who aren't as familiar with the story, could you give us a bit of a high-level overview of the key segments of the business and how they fit together to form the strategy of Innoviva?
Sure. I think it's helpful to understand a little bit of the history of the company as well and how we got here. Innoviva actually was originally formed to maximize the value of a portfolio of royalties that came from some products that we co-developed with GSK, and then they marketed. Those products are some of the most popular respiratory products and most successful respiratory products in the world. Those did very, very well. As the revenues from those royalties grew, we reached a point where we started to think about deploying that capital productively. One of the first areas that we looked at was finding areas of high unmet medical need that may be undervalued by the larger market. That led to a number of investments, which has brought us to where we are today with actually three different business segments.
We still have the royalty portfolio, which is very productive and provides us with stable revenues and cash flows. We also have now a fully integrated biopharma business that is focused on critical care and infectious disease in the hospital segment. Finally, we have a portfolio of other strategic healthcare assets, which are a collection of investments and ownership stakes that we have in high growth potential assets in a number of different areas of high unmet medical needs.
are a lot of opportunities across all those segments. Maybe before we dive into the individual segments, though, there's a lot going on in the macro environment when you think about it from a regulatory perspective and from a policy perspective. I'm sure there's a lot of interest in how all of that could affect Innoviva. If you could just spend a minute talking about that with the various dynamics going on more broadly, how much of that in the macro environment influences you from tariffs to policy changes, etc.
Yeah, that's a great question. Obviously, we're in a time of a lot of uncertainty. We, similar to others in the industry, spend a lot of time following this and thinking about how it could impact our business, ways that we can mitigate the risks. We're trying to think of it as a time of opportunity and trying to find opportunities in the disruption and some of the uncertainty. Thinking about our businesses, our royalty assets, they're mature products. They're very much diversified across geographies and also across a couple of indications. Given the maturity of the products, I think they're relatively protected from any dramatic impact from policy changes or from individual regional changes.
From the IST business, which is what we call Innoviva Specialty Therapeutics, that's our hospital and critical care business, I think we're fortunate in that we're somewhat shielded from probably the two most obvious risks, being tariffs and pricing policy changes. That's because on the first hand, our supply chain doesn't have a lot of concentration in any single sort of high tariff region. On the pricing side, we very much have a U.S. focus in our commercial business, so some of the international pricing risks and those things wouldn't have as much of a direct impact on our business. I think we're in a fortunate position, but we're also obviously thinking about ways to mitigate those risks as much as possible. On the flip side, as investors as well, we see this as a time of opportunity where there is some disruption.
There are some companies that are going to struggle now and in the future with some of these changes. We think that that could create opportunities to find attractive assets or attractive new investments.
That's great. That's a helpful background as we start digging a little more into the key segments and dynamics of the business. Maybe starting with more of the royalty distributions business, can you just talk us through a little more about those kind of key assets, the characteristics of those, and the expectations over the next five years of how those should grow?
Sure. Our royalty portfolio is composed of two products. One is called BREO and the other is called ANORO. As I said before, these are two of the most successful respiratory products in the world. BREO is for the treatment of asthma and COPD, and ANORO is for the treatment of COPD. A few of the nice characteristics of these products, one is that they're very well characterized, well used, and well liked. The second that really contributes to the durability of these revenues, which is important to us, obviously, is that they're what's known as sort of maintenance therapies. As opposed to another indication where if a new drug comes along, you would switch over to that drug if you thought it had some advantages. With maintenance therapies, if you're using something that works, you never change, right?
To the extent where the majority of patients now at this point are well controlled year over year on these medications, there's no real incentive or catalyst to change. Even if there are new either branded or generic competitors, these products are going to be very resilient. In addition to that, they are very broadly marketed across many, many countries, and that provides some geographic diversity and resilience as well. Finally, they have a very strong IP portfolio. Both BREO and ANORO are protected by a range of primary and secondary patents that provide some additional durability into the 2030s.
You mentioned kind of the broad geographic reach of those two products. Can you just talk a little bit about that dynamic? Are there certain regions that are higher growth potential than others? I guess GSK is the partner with you on this. How does that relationship work as they seek to commercialize the assets? Is it a conversation there, or is it mainly them kind of leading the show?
Yes. In terms of the sort of geographic reach, at this point, given the maturity of the products, they actually have the majority of sales for each BREO and ANORO are ex-U.S. Those regions tend to be, since they were launched more recently out there, there's not as much competition. Those tend to be growth regions as well. You have kind of a dynamic where over time you have pricing pressures and other similar things that mature products face in the U.S. that could lead to a slow year-over-year decline, but that's counterbalanced by growth ex-U.S. As a result, you have very stable revenues. Additionally, the markets ex-U.S. tend to not have as much competition from new entrants in generics because there's a delay, there's regulatory complexity for getting into those markets. That provides a nice buffer to, again, extend the longevity.
In terms of our relationship with GSK, I think earlier on there was more of a sort of strategy collaboration on maximizing the value of these products. At this point, they're well established, they're mature. We have a productive partnership with them, but it's not as much of a sort of operational partnership.
Understood. Maybe we can switch now into the Innoviva Specialty Therapeutics, which is quite an interesting, unique portfolio that you've put together. Could you just provide a bit of an overview of that portfolio and how your strategy is maybe similar or dissimilar to others who may have pursued commercialization in the hospital space or within the infectious disease space?
Sure. Yeah. The Innoviva Specialty Therapeutics business, or IST, is made up of four marketed products in the hospital, in the critical care and infectious disease indication. We put together this portfolio very, very thoughtfully and strategically. I think one of the advantages that we have compared to other companies that have operated in this space is that we were able to come in sort of intentionally and learn from some of the challenges that those companies had faced. I think a lot of that was driven by the dynamic that shifted when big pharma kind of deprioritized the infectious disease and hospital space more broadly.
What you were left with was a number of smaller companies trying to commercialize either single products or small portfolios that weren't necessarily highly differentiated products or didn't have the sort of long-term financial horizon that you'd need if you're going to commercialize something in the hospital space. We were able to sort of handpick the products that we wanted to enter the space with. One of those was a product called ZEVTERA, which is in our portfolio, a highly differentiated anti-infective product in an area of very high unmet medical need. Another lead product is GIAPREZA, which is a very differentiated lifesaving product in the critical care space.
We thought if we could build some more scale around these really differentiated products and be able to have a very focused commercial strategy built around these differentiated products, but also with a long-term vision and sort of long-term patient capital, we could build a growing profitable business in this space. I think so far that hypothesis has panned out very well. Our IST business has been very successful and continues to grow and I think exceed most people's expectations that saw us doing this early on.
That's great. Can you talk us through some of the drivers of that? I mean, we talk about the hospital space. What are the key tailwinds or headwinds that you're currently seeing in the business that's really kind of contributing to that performance?
Yeah, I'd say, I mean, specific to our business, I think the two major growth drivers right now are, one, is around GIAPREZA, which is really just about, I think, commercial execution. As I mentioned, that very lean, focused, targeted commercial execution, but also expanding the opportunity through new data generation, kind of expanding into new patient populations and really focusing on data generation and medical education. That's been a big growth driver since we acquired that product as part of the founding IST portfolio. The second is the very successful launch of XACDURO. We launched XACDURO, which is a product that is indicated for a specific infection that before the launch of, or before the availability of XACDURO, had really nothing that was successful in treating it, called carbapenem-resistant Acinetobacter, a very high mortality rate by a very high unmet medical need.
That launch has been probably one of the most successful antibiotic anti-infective launches of the last half decade or more. That continues to be a big driver. At the macro level, I think one of the big drivers or big tailwinds for our business as a whole is just the threat and growth of antimicrobial resistance. That's a major public health threat that probably doesn't get as much attention as it deserves. It's one of the top priorities for the World Health Organization and the CDC. Unfortunately, that's creating a lot of new unmet medical need as previous treatments or new infections arise that there aren't good treatments for. In looking in the past, that's what's driven a lot of the growth of our business.
Looking forward, I think the two major growth drivers that you'll see coming in the next year are, one, we just recently launched our fourth product, a product called ZEVTERA, which is primarily used for the treatment of Staph aureus bacteremia, in particular, resistant strain, MRSA resistant strains. On top of that, coming up at the end of the year, we have an FDA PDUFA decision for our product called zoliflodacin, which again is for the treatment of resistant infections, in this case for gonorrhea. Those are a couple of the growth drivers that we're looking forward to.
Yeah. You mentioned that FDA PDUFA decision that's upcoming. I mean, how important is that to kind of the growth of the franchise? Do you expect that to be a meaningful contributor going forward? What's the scale of that opportunity?
Yeah, I mean, it's absolutely, it's the next sort of major milestone that we have, and we're very excited about it. We do think there's a lot of opportunity there. This is certainly the largest indication that we'll be taking on. Gonorrhea is a major problem both in the U.S. and worldwide. There's over approximately 1 million cases a year in the U.S. and over 80 million a year worldwide. This is a big problem, but also a big opportunity for us because the current standard of care has two real issues. The current standard of care is injectable ceftriaxone. One of the issues is that it's an injection, which nobody likes. Zoliflodacin, if it's approved, will be a single dose curative oral treatment. Obviously, that introduces a convenience aspect into the market, which we think has a lot of value.
The major issue here is that there's growing resistance to ceftriaxone worldwide and also in the U.S. There are some Asian countries that have as high as 30% resistance to ceftriaxone. This is a major priority of the WHO and CDC of bringing new treatments into this market because they foresee a future where there aren't good treatments for gonorrhea. We're excited about the potential for zoliflodacin for our company, but also for patients.
That's great. Putting all that together, I mean, what is really the sales magnitude opportunity for this division, and where do you think you can take that over the next few years?
Sure. We are very optimistic about the portfolio. It's been growing very well to date. We haven't given specific guidance on each individual product, but we have shared that we expect this year to have over $100 million in net sales in the U.S. Based on the first two quarters' performance, I think that's looking like a very achievable target. We think at peak, the portfolio as a whole could easily be over half a billion dollars.
That's meaningful. Let's switch to the strategic healthcare assets. Could you discuss the composition and characteristics of that business?
Yeah. As I said before, this is a portfolio of companies where we have some kind of ownership stake, but we don't operate them directly. These are companies that we see as high growth potential assets with innovative treatments or technologies in areas of high unmet medical need. Collectively, they don't represent a large financial investment from our side, but they have really an asymmetric risk-reward upside opportunity. We're very excited about them, and they've had a lot of recent progress as well to be excited about.
Okay. There’s a lot of opportunities out there that need investment. How do you kind of filter through that, and what really stands out for you when you look at what you want to invest in in that business?
Yeah. This is really an extension of our strategy of trying to find undervalued assets in areas of high unmet medical need. That can be either because they're in an industry that is sort of unfavored or sort of no one's paying as much attention to, or as we talked about with some of these macro environment changes, could just be broader disruptions or given the difficulty of fundraising right now as well. There's a lot of companies out there that could be at attractive valuation. I think one good example of this is actually our IST business started off as one of the strategic healthcare assets. That actually started off as an equity investment in a company called Entasis Therapeutics. As we sort of got more involved with the company, through our investment, got to know them better, we then found opportunities to further support them.
As their pipeline advanced, we actually thought this would be an opportunity to acquire them and then build out some scale around them, which we did with the acquisition and integration of a company called La Jolla Pharmaceutical Company, which brought GIAPREZA and XERAVA. That has turned into a very successful and more sort of central opportunity for us. We think about the sort of other strategic healthcare assets in that same light, things that we think just as simply as a financial investment could have a high ROI potential, but then could also provide an opportunity for us to sort of get more involved or deploy more capital to help grow those businesses.
That's helpful background. Maybe that allows us to shift a little bit into recent performance. Can you talk a little bit about just the Q2 results in the context of some of the key accomplishments of the portfolio or the different businesses and really kind of what's working well at this point?
Yeah, sure. We're very happy with our second quarter results. I think it's really been a pattern over the last number of quarters that we're very happy with. This last quarter, we had over 50% growth year- over- year in our IST business. From the royalty business, we were again pleased to see very stable revenues. The royalty portfolio has over the last few years consistently quarter- over- quarter exceeded analyst expectations, which has been a nice sort of surprise for us every quarter. If you look out, the analyst consensus for the next five years is projecting over $1 billion in royalty revenue to come to us. That's kind of what we based our expectations on, but also they continue to beat those expectations. That's nice. A few things to highlight in the last quarter for the IST business. One, as I mentioned, was the launch of ZEVTERA.
We're very excited for what that's going to mean for our portfolio going forward. The second was our NDA was accepted by the FDA for zoliflodacin with a PDUFA date in December. Another major milestone there. On the strategic healthcare asset side, one thing I'll highlight is we had a pretty remarkable achievement at one of our portfolio companies, which is a company called Armata Pharmaceutical. They are in the development of bacteriophage therapies to treat difficult-to-treat infections. It's a very innovative approach. It's a modality that's been used globally for some time, but hasn't had a lot of focus in the U.S. They actually just had a phase II clinical trial for one of their products for Staph aureus bacteremia, which had an absolutely groundbreaking result. The standard of care in Staph aureus bacteremia for both MRSA and MSSA is about 70%- 80% efficacy.
In their phase II trial, they showed 100% clinical response. This is a very difficult-to-treat infection with a high mortality rate. If that type of result were to replicate in a larger pivotal trial, that would obviously be a pretty big paradigm shift in the potential for treatment of these types of infections. We're very excited about that.
Yeah, that's really exciting. Could you just talk a little bit about what are the expectations for the rest of the year? Obviously, you have a FDA PDUFA decision coming up. Anything outside of that? Would you say more of the same or kind of any acceleration in those businesses throughout the rest of the year?
Yeah, so certainly more of the same would be great. We're on a good track. We have a lot of momentum, so we continue to have high expectations for the royalty business to continue to provide revenues and cash to us. From the IST business, I think if we can continue this growth trajectory, which shows no sign of slowing, we'll be very happy. Obviously, very much looking forward to the FDA PDUFA decision. Also, I think a thing for us to watch closely is the launch of ZEVTERA. That's a sort of exciting early stage launch. I think once it gets onto formularies and gets in the hands of patients, we should see some good results there.
We're in an exciting position where a year from now we can have three products that are in sort of launch mode and high growth mode at the IST business, as well as some exciting growth from the strategic healthcare assets.
Great. Maybe we'll shift a little bit into kind of balance sheet and capital allocation. Obviously, three different businesses, each with their own opportunities. How do you think about prioritizing capital between investments, particularly on the IST and the strategic investments?
Yeah, sure. That's a great question, something that we think about a lot. The IST business, I think we're very fortunate to be in a position where it's not a huge use of capital anymore. We invested capital in there over the last number of years, obviously to accelerate that growth. Now it's generating a lot of revenue on its own, so we're in a position where we can be really thoughtful about specific opportunities and specific areas we want to invest in in that business, whether that's in commercial acceleration or whether we find opportunities for inorganic growth. For example, the acquisition that we made for the in-licensing of ZEVTERA last year. We're always looking for additional opportunities to deploy capital productively there, but it's sort of at our discretion. It's not something that needs a lot of capital now.
It's something that we can be thoughtful and opportunistic about. On the strategic healthcare asset side, those are companies that we continue to support financially in the portfolio as we see opportunities to help them grow and to drive more value in the long term. Obviously, looking for new areas to make investments, and we think we're in a very fortunate position where we have capital in an environment that has proven to be difficult for companies to fundraise in and not as much free-flowing capital. I think that generates a lot of opportunities for us as investors. I'd say the final area is we're always thoughtful about ways to return capital to shareholders. At the end of the day, our mission is to sort of create value for our shareholders. We have, over time, in the past, taken opportunities to return that capital.
Example, just last year, we completed a $100 million share buyback and have done other major capital returns in the past. We're always open to those types of approaches as well.
Got it. As it relates to kind of business development and acquisitions, as you step back and reflect on the deals that you've done historically, how aggressive are you guys looking to be on maybe some of the processes of the auctions, some of the more mainstream assets out there versus looking for things that are a little bit off the beaten path?
Yeah, I think the history of our acquisitions has probably been more on the, and investments have probably been more on the off the beaten path. That's where we tended to find value opportunities in the past in some of these maybe unloved areas or sort of underserved areas. I think we're also, that's shifting a little bit to where sort of more companies in more sort of mainstream areas are needing capital. I think we've also kind of demonstrated that we have both some investment expertise, but also some strategic and operational expertise. We've developed those muscles internally a little bit that I think those can also be used in other areas. I guess to answer your question directly, I think we still like some of these unique situations and maybe we like finding opportunities in areas where others aren't looking as closely.
We also think that we can sort of participate more in the mainstream as well and find opportunities there and have some value to bring to any other company or situation.
Very helpful. Maybe we'll pause here and see if there's any questions from the audience in the few minutes that we have left. Maybe just a couple more from me. When you think about the IST business, obviously kind of in the anti-infective space, you have the asset that's kind of in shock and acute care. What other things are you willing to kind of bolt on outside of that that could be a really good fit to continue to build out that business? Are there particular areas that you're looking at?
Yeah, we've demonstrated that we can be successful in the hospital space, which is something that not a lot of people have been able to do. It takes both strategic and operational thinking that's pretty unique to that space. I think we're in a nice position where any other asset that is trying to commercialize in the hospital would see us as a strong partner because we've, to some extent, cracked that nut a little bit. That can be relevant to things that are in our core, which would be infectious disease and critical care, but also things that are adjacent to that core, other things that are either commercialized or looking to launch into the hospital space or the peri-hospital space. We're certainly open to evaluating opportunities to grow the IST footprint in that area.
Helpful. Now, as you step back and just think about Innoviva as a company and the value that kind of bringing together these three segments derives, I mean, really what would you have, how would you want investors to think about you as an investment opportunity and why it's a unique and valuable one for them to consider?
Yeah, thanks. That's a great question. We are certainly a unique company. We have a unique structure. I think in this current environment, that provides a lot of advantages. We have a very stable base of revenues from our royalties and now from our growing therapeutics business as well. That really provides investors with some downside protection that is probably unique in the biotech environment. At the same time, we provide exposure to some of this high growth potential, both from our therapeutics business and our other strategic healthcare investments. I think our profile is a nice balance between downside protection and upside potential. Maybe one thing to highlight that or to illustrate that opportunity is one of our companies, one of our strategic healthcare asset companies, is called Sentio. They're a neuroscience company that is developing some novel drugs for the treatment of depression.
They're backed by a very unique and innovative platform around synaptic health and synaptic mapping. Clearly, as a clinical stage company, there's some risk there. We think we have identified, we sort of identified them as a de-risked opportunity relative to other companies in their space and their stage. At the same time, if they are successful, you could easily see them having sort of multiple blockbusters come out of that platform and have a valuation that would be a massive ROI to the financial investment that we've made. We have a number of opportunities like that across our portfolio that the downside risk is limited, but the upside potential is really strong.
That's great. Really interesting. Thank you for taking the time with us, Austin. Unless there's any other questions from the audience, we can probably go ahead and break. Thank you all for joining this fireside chat with Innoviva.
Great. Thanks, Jason. Thanks for having us. Really appreciate it.