Nature

1 Health care stock that could fly higher after a strong fourth quarter


JThe pharmaceutical business can be challenging for companies and investors, as money is invested in the development of drugs that may or may not gain US or international Food and Drug Administration (FDA) approval to market and sell.

Innoviva (NASDAQ: INVA) different approaches to investing in pharmaceuticals. It does not market or sell any of the drugs that generate the company’s revenue – and has helped its stock soar 108% from its pandemic low in March 2020. This surge in share price does not may just be the start of something even bigger for investors.

Image source: Getty Images.

How it works

Innoviva provides financing to pharmaceutical companies in exchange for royalties based on sales. The money donated helps drug makers advance in development, manufacturing and marketing. Innoviva’s royalty portfolio is based on a partnership with GlaxoSmithKline as well as a growing stability of health care investments in companies focused on significant unmet medical needs.

The partnership with GSK is Innoviva’s main revenue generator and is based on a portfolio of Ellipta inhalers offered worldwide under four brands, each aimed at treating and preventing respiratory problems caused by respiratory conditions such as COPD and asthma.

As part of the initial partnership, GSK also invested in Innoviva, owning approximately one-third of the company’s outstanding shares. But in May 2021, that part of the partnership changed, benefiting the future growth of both companies. GSK sold its 32 million shares of Innoviva back to Innoviva for $12.29 per share. The sale raised $392 million in proceeds for GSK to use for future investments.

Luckily for Innoviva, the timing of the stock trade was perfect. Its stock rebounded from a pandemic low and has since risen 50% in less than a year, essentially covering half of its expenses to buy back the shares.

Potential for additional royalty growth

Innoviva reported increases of 18% and 19% in revenue during the fourth quarter and full year 2021, respectively, amounting to $111 million for the quarter and $405 million for the year. This was spearheaded by royalties from Relvar/Breo Ellipta and Trelegy Ellipta. For the quarter, the company reported 3% year-over-year global sales growth for Relvar/Breo due to increased patient adherence. Meanwhile, Trelegy sales jumped 53%, supported by growth in the United States and expansion into new markets.

Total respiratory sales rose 20% in the fourth quarter for GSK, helped by increased sales from Trelegy – a good sign for future royalties for Innoviva if sales growth continues to pick up. Innoviva currently collects a 15% royalty on sales from Trelegy. Based on projections by market research firm Reports and Data, this upward trend is likely to continue through 2027 as the respiratory inhaler market is expected to climb at a compound annual rate of 6.8% for reach a market value of $52 billion.

Partly by controlling costs, the company increased operating profit 23% for the quarter and 17% for the year, resulting in net profit growth of 40% for the year to 2, $87 per share. This helped the company end 2021 with over $200 million in cash, which it is already using for future expansion.

Investment in Armata

Indeed, Innoviva does not intend to rely solely on royalties from a single main partnership. After an initial investment of $25 million in Armata Pharmaceuticals in 2020, Innoviva added to this by investing an additional $49 million in Armata starting in February. When this latest investment closes, Innoviva will own 70% of Armata’s outstanding shares.

Armata is a clinical-stage biotechnology company focused on therapeutics to address clinical needs for anti-infective treatments in which resistance to current antibiotics has been observed. Its pipeline includes phase 1/2 studies of treatments for respiratory infections related to cystic fibrosis and pneumonia and treatments to combat bacterial bloodstream infections and prosthetic joint infections.

This year, treatments for cystic fibrosis were in the spotlight after the Donnelly Center for Cellular and Biomolecular Research at the University of Toronto published positive news related to the potential to predict various patient symptoms and responses to processing. Further developments and research around this data could lead to life-changing treatments, including those from Armata that are still in clinical trials.

One challenge Innoviva faces is fierce competition in the cystic fibrosis market. Vertex Pharmaceuticals has about 97% market share, and AbbVie has active phase 2 clinical trials for its own treatment, so it won’t be easy to get started on these rivals. But with the market expected to reach $14 billion by 2027, that leaves room for Armata and Innoviva to generate revenue if and when the products become commercially available. How long that might be is another question. Move from Phase 1/2 clinical trials to FDA approval — if approval is granted – could take another three to seven years.

Other investments in works

In the meantime, Innoviva is looking to diversify its investments by offering to buy the remaining 49% of Entasis shares, which would give it all the remaining shares it does not currently own. Entasis focuses on bacterial infections. It is emerging from positive results in phase 3 studies for a potentially life-saving treatment for infections that occur in the bloodstream, urinary tract and lungs.

Entasis is targeting a New Drug Application submission to the FDA for approval in mid-2022, which could occur in 2023. Innoviva’s earnings could make its stock worthwhile for long-term investors.

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Jeff Little has no position in any of the stocks mentioned. The Motley Fool owns and recommends Vertex Pharmaceuticals. The Motley Fool recommends GlaxoSmithKline. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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