The pharmaceutical business can be challenging for companies and investors as money is poured into developing drugs that may or may not achieve U.S. Food and Drug Administration (FDA) or international approval to market and sell.
Innoviva (INVA 1.77%) approaches investing in pharmaceuticals differently. It doesn't market or sell any of the drugs that generate the company's revenue -- and have helped its stock soar 108% from its pandemic low in March 2020. That run-up in stock price may just be the start of something even bigger for investors.
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How it works
Innoviva provides funding to pharmaceutical companies in exchange for royalty payments based on sales. The money paid out helps the drugmakers progress with development, manufacturing, and marketing. Innoviva's portfolio of royalties is anchored by a partnership with GlaxoSmithKline along with a growing stable of healthcare investments in companies focusing on significant unmet medical needs.
The partnership with GSK is the primary revenue generator for Innoviva and is based on a portfolio of Ellipta inhalers offered globally across four brand names, each aimed at treating and preventing breathing issues brought on by respiratory conditions such as COPD and asthma.
As part of the initial partnership, GSK invested in Innoviva as well, owning approximately one-third of the company's outstanding shares. But in May 2021, that part of the partnership changed, benefiting both companies' future growth. GSK sold its 32 million shares of Innoviva back to Innoviva at a price of $12.29 per share. The sale allowed GSK to raise proceeds of $392 million to use toward future investments.
Fortunately for Innoviva, the timing of the stock transaction was just right. Its stock was on a rebound after a pandemic low and has since grown by 50% in less than a year, basically covering half of its expense to buy back the shares.
Potential for further royalty growth
Innoviva saw 18% and 19% increases in revenue during fourth-quarter and full-year 2021, respectively, amounting to $111 million for the quarter and $405 million for the year. This was led by royalties from Relvar/Breo Ellipta and Trelegy Ellipta. For the quarter, the company saw 3% global sales growth year over year for Relvar/Breo due to increased patient adherence. Meanwhile, Trelegy sales jumped 53%, bolstered by U.S. growth and extension into new markets.
Total respiratory sales were up 20% in Q4 for GSK, helped along by the increased sales of Trelegy -- a good sign for future royalties to Innoviva if sales growth continues to trend upward. Innoviva currently captures a 15% royalty payment on sales of Trelegy. Based on projections from market research firm Reports and Data, that upward trend could likely carry through 2027 as the respiratory inhaler market is projected to climb at a 6.8% compound annual rate to a market value of $52 billion.
Partly by keeping costs in check, the company increased operating income 23% for the quarter and 17% for the year, resulting in net income growth of 40% for the year to $2.87 per share. That helped the company finish out 2021 with over $200 million in cash, which it is already putting to use for future expansion.
Investment in Armata
Indeed, Innoviva has no intentions of relying solely on the royalties from one primary partnership. After an initial investment of $25 million in Armata Pharmaceuticals in 2020, Innoviva has added to that by investing $49 million more in Armata as of February. When the latter investment closes, Innoviva will hold 70% of Armata's outstanding stock.
Armata is a clinical-stage biotech company focused on therapeutics to meet clinical needs for anti-infection treatments in which resistance to current antibiotics has been seen. Its pipeline includes phase 1/2 studies in treatments for respiratory infections related to cystic fibrosis and pneumonia and treatments to fight bacterial infections in the bloodstream and infections in prosthetic joints.
This year, treatments for cystic fibrosis have been in the spotlight after the University of Toronto's Donnelly Center for Cellular and Biomolecular Research came out with positive news related to the potential for predicting various patient symptoms and treatment responses. New developments and research around this data could lead to life-changing treatments, including those from Armata that are still in clinical studies.
A challenge facing Innoviva is stiff competition in the cystic fibrosis market. Vertex Pharmaceuticals owns about a 97% market share, and AbbVie has active phase 2 clinical trials for its own treatment, so moving in on these rivals will not be easy. But with the market expected to grow to $14 billion by 2027, it does leave room for Armata and Innoviva to generate revenue if and when products become commercially available. How soon that might be is another question. To go from Phase 1/2 clinical trials to an FDA approval -- if approval is granted -- could take another three to seven years.
Other investments in the works
In the meantime, Innoviva is looking to diversify its investments, offering to buy the remaining 49% of shares of Entasis, which would give it all remaining shares it doesn't currently own. Entasis is focused on bacterial infections. It is coming off of positive results in phase 3 studies for a potentially life-saving treatment against infections that occur in the bloodstream, urinary tract, and lungs.
Entasis is targeting a mid-2022 new drug application submission to the FDA for approval, which could take place in 2023. As a 51% shareholder in Entasis -- and on the back of royalties from GSK products -- Innoviva's revenue growth could benefit, making its stock worthy for long-term investors to consider.
