Description

Overview

It’s been a while since BlueFIN24’s initial writeup, and though he was mostly spot on, a lot has transpired since so I decided to write up the story again. I also believe this last Friday presented one of best risk rewards in LQDA’s stock over the past few years as the story has been mostly de-risked and the stock was down 6% on Friday on no news.

I believe the stock is an easy double or triple over the next 12 months, and a potential 10-bagger over the next 3-5 years.

PAH Disease Overview and the PAH Market

Around the globe, pulmonary arterial hypertension (PAH) impacts an estimated half a million individuals. Within the U.S., around 50,000 of these patients are currently under treatment. The root causes of PAH span a wide range, from hereditary factors to underlying health conditions such as cardiovascular diseases and other systemic diseases like HIV or connective tissue disorders. In recent times, there has been a noticeable upsurge in PAH diagnoses, attributed largely to aging populations and lifestyle-induced factors. Patients with PAH are generally categorized based on the severity of their symptoms:

Class I: Essentially asymptomatic, making diagnosis at this stage quite uncommon.

Class II: Presents symptoms during routine activities but remains symptom-free at rest.

Class III: Displays evident symptoms that significantly restrict everyday activities.

Class IV: Presents with severe symptoms that limit any form of physical activity and may even manifest at rest.

The distribution among these classes leans towards the more severe, with only 10% in Class I, 35% in Class II, 45% in Class III, and 10% in Class IV.

Treatment for PAH predominantly employs vasodilators, which are designed to widen blood vessels. One particular vasodilator, Treprostinil, is typically prescribed for patients in the advanced Class III/IV stages due to the challenges associated with its administration. This drug can be taken orally, injected, or inhaled after conversion into an aerosol. Oral intake is linked with serious side effects like digestive issues, potential harm to the liver, and risks during pregnancy. Direct injection necessitates the surgical placement of a venous catheter, which, despite its effectiveness, can be cumbersome and has associated risks. The inhalation method involves a nebulizer device, akin in size to a compact kettle, which converts liquid Treprostinil into an inhalable mist, typically used between 4 to 9 times daily. Although its side effects are milder, including cough and throat discomfort, these can influence the maximum tolerable dosage.

PAH is a subset of the broader category of pulmonary hypertension (PH), and there are other PH-related conditions where inhaled treprostinil might be effective. As of April 2021, Tyvaso was green-lighted for treating PH related to interstitial lung disease (PH-ILD), which affects an estimated 30,000 to 40,000 patients. Moreover, it is undergoing advanced trials for chronic obstructive pulmonary disease-related PH (PH-COPD). This represents a vast potential user base, considering the 15 million COPD-afflicted Americans, with a significant portion presenting with PH of varying degrees. Additionally, Tyvaso is being tested for idiopathic pulmonary fibrosis, a condition causing lung tissue to scar and which impacts around 200,000 individuals.

UTHR aspires to expand its current PAH patient base, aiming to cater to 25,000 patients by 2025, with a significant portion coming from non-PAH related conditions.

Quick Background

UTHR is the heavy weight in this $5B+ PAH market. Treatments can be administered orally (pills with significant side effects), by injections, or by inhalation. Different drugs and administration methods can be used depending on the progression of the disease and UTHR has drugs in all categories. However, UTHR’s crown jewel is Tyvaso which is an inhaled form of Treprostinil and can be used with a cumbersome and large nebulizer, or a small inhaler - Tyvaso DPI - that recently received FDA approval.

In the most recent quarter (Q2 ‘23), Tyvaso generated $319M of revenues out of a total of $596M (54% of total revenues) and is demonstrating the fastest growth of all other drugs (by far), so it is safe to say Tyvaso is responsible for >70% of UTHR market cap of $10.3B.

LQDA’s Yutrepia, which is also an inhaled form of Treprostinil is a direct competitor of Tyvaso, and specifically Tyvaso DPI. Similarly to Tyvaso DPI, Yutrepia also offers inhaled Treprostinil using a small and convenient inhaler. This is what Martine Rothblatt, UTHR’s CEO, had to say on the nebulizer vs inhaler dynamics during March 2019 (Oppenheimer Healthcare Conference):

“I do believe there will be a very rapid replacement of nebulizers with that dry powder inhaler. It's so small, it's so convenient … I think there's going to be a 100% replacement of nebulizers”

Since this quote, after seeing LQDA is nearing its launch, Martine started singing a different tune claiming that many patients are emotionally attached to their bulky and inconvenient nebulizers, and she believes many patients won’t switch to an inhaler. This makes zero sense on its own, unless one considers she feels threatened by the entrance of LQDA.

Is this a simple case of a generic overthrowing an existing branded drug?

In short – No.

I won’t get into all the specifics, but generally speaking – the issue here is that even though the active ingredient (Treprostinil) is a generic, it is quite complicated to engineer it to be able to be inhaled. UTHR has many patents on the process (hence the litigation that will be discussed below), and LQDA (through their unique PRINT technology – that I will not discuss in this writeup) has patents that cover a different process of reaching an inhalable version. Thus, it is unlikely that pricing will deteriorate significantly, or that other generics will enter the market anytime soon.

This also means that UTHR’s Tyvaso DPI and LQDA’s Yutrepia are not identical. In fact, most KOLs believe Yutrepia is superior in several ways. There are still no head-to-head comparison of the two drugs, but LQDA is working on a trial to demonstrate this.

A couple of the most significant differences are:

• Yutrepia has demonstrated the ability to be administered at higher doses which is very important as patients keep deteriorating and need higher doses – the ability to stay on the more convenient inhaled option for longer is critical for doctors and patients.
• Yutrepia is using a low resistance inhaler. This is critical to patients who have difficulties breathing deeply (cough cough [no pun intended] – PAH ILD – which is the new and largest market for Tyvaso).

So it is very possible that if Yutrepia launches, it will eventually overthrown Tyvaso and get >50% market share.

Does winning market share mean that patients need to switch from Tyvaso to Yutrepia?

It is always a challenge to change consumers’ or patients’ behavior. So, will LQDA need to overcome this challenge? Again, the answer is – No.

The nature of PAH is such that an average patient will stay on the inhaled treatment for ~4 years (before they will have to switch due to disease progression). This means that every year 25% of the patient population will need to start using an inhaled product for the first time and will have to choose between Tyvaso and Yutrepia.

History Since the Beginning of Litigation

In June 2020, UTHR began a patent battle filing a Hatch-Waxman infringement claim on three Tyvaso patents (‘066, ‘901, ‘793). By filing the lawsuit, UTHR triggered a 30 month stay on the FDA final approval.

In November 2021 Yutrepia received tentative FDA approval. Tentative as the company would need to finish the 30-month stay or resolve the litigation before receiving full approval.

In October 2020 an undisclosed party (most likely UTHR) made a licensing bid for the business worth ~$8 per share for LQDA’s shareholders (LQDA share price at the time was $2.80). LQDA declined the offer.

In December 2021, UTHR agreed to drop the ‘901 patent from the Hatch Waxman litigation due to non-infringement on the part of LQDA.

In January 2022 Roger Jeffs was appointed as CEO of LQDA. Jeffs is a co-founder of UTHR and was co-CEO of UTHR. It was obvious he wouldn’t accept the role if he didn’t see very significant upside for LQDA.

In May 2022 UTHR received FDA approval for Tyvaso DPI.

In July 2022, the PTAB have found that all the claims of the ’793 patent have been shown to be unpatentable.

In August 2022 the district court decided that:

• 5 of 6 asserted claims of the '066 patent are invalid.
• The only valid claim of ‘066 is not infringed by Liquidia.
• Liquidia would induce infringement of the 5 asserted claims in the ‘793 patent. Importantly, the PTAB had already decided previously that the ‘793 is invalid. I won’t go into the reasons why the PTAB and the differed on their decision, suffice to say that in such cases (if the PTAB decision stands on appeal) the appeals court for the district court decision will almost always side with the PTAB.

Recent Litigation Developments

In July 2023, the U.S. Federal Circuit (the appeal venue) affirmed all district court rulings in the patent litigation. The share price touched $10 before the decision on optimism the court might align with the PTAB (on ‘793) on the appeal, allowing LQDA to launch immediately. The share price took a dive after the decision though it is still very likely to reach a favorable result for LQDA by Q1 2024 (results of the PTAB appeal).

On July 27^th, 2023 Liquidia Submitted Amendment to Add PH-ILD Indication to Tentatively Approved NDA for YUTREPIA. Tyvaso has PH-ILD market exclusivity that expires on March 31^st 2024, so if the Hatch-Waxman litigation is put behind us, LQDA will be able to launch in the PH-ILD market in Q2 2024

The summary of the above is that of now, all 3 patents included in the 30 months stay were found invalid or not infringed by either the PTAB or the district court. The district court’s decision has also stood on appeal, and all that is left now between LQDA and the PAH market is that the PTAB’s decision will stand on (a very weak) appeal. The appeal should be heard around October and a decision can take between days and roughly a couple of months.

Additional New Patents

On June 28, 2023, UTHR received a notice of allowance with respect to its patent application number 17/233,061, for PH-ILD. The patent will likely not stand in courts and even if it will LQDA can overcome this by a skinny label – you can read more about it here.

On August 15, 2023, UTHR was issued patent number 11,723,887, the claims of which generally cover the manufacture of Treprostinil salts. This patent belongs to the same patent family as U.S. patents 9,593,066, 9,604,901, and 8,497,393, each of which has been subject to previous litigation, and covers the same basic method of manufacturing Treprostinil.

Importantly, these patents do not impact the launch timeline and the resolution of the Hatch-Waxman litigation.

Valuation

If LQDA is cleared of the Hatch-Waxman litigation and is able to launch, it will go after UTHR’s crown jewel. Let’s assume this market will take 5 years to be split 50/50. If we assume that 70% of UTHR’s market cap is supported by Tyvaso this means LQDA could support a $3.6B market cap in 5 years ($10.3B x 70% x 50%). This is a 9x on the current market cap (417M) at a $6.45 share price. This is not even the blue sky case where LQDA wins more than 50% of the market which in itself should grow.

How much would that be worth the day after they win the PTAB appeal? I would guess that at least $15 a share (130% upside) over the next 6 months at most.

Risks

• UTHR wins PTAB appeal.
• Longer term – company failed with its go-to-market.

Catalyst

PTAB Decision.