Description

SYNOPSIS: The market does not appreciate the significance of the news of a competing licensing offer and the possibility of a potential takeout/licensing deal by November 14th ($+10). If that catalyst does not come to fruition then LQDA becomes a compelling longer-term opportunity as they bring approved therapies to market in 2022 ($13-25). The stock is trading for $4.48 (10/26/2020 close) with ~$2.50 in cash on the balance sheet. This is a pretty easy - risk $1 to make $6 over the next three weeks and then longer term its a risk $4.50 to make +$20.

THESIS: LQDA is a long here because:

·         The recent unsolicited inbound licensing offer is most likely UTHR, which 1) has a significant commercial interest in acquiring legitimate threats to their PAH franchise, 2) would not like to see two competitors join forces, and 3) the CEO of UTHR has perhaps a personal interest in not letting her former co-founder get control of a competitor. We believe a deal would have to be well above the recent equity offering of $8 and in the $10-12 range.

·         If the near term take out/licensing deal does not occur, we believe at the very least this inbound interest validates the strength of LQDA’s technology and their IP position. LQDA should still see a positive PDUFA on November 25th and be able to clear the patent litigation issues for a late 2022 launch and combined with RareGen have a large (and expanding) TAM in two categories.

BACKGROUND ON PAH: Pulmonary Arterial Hypertension (PAH) is a rare life-threatening disease that affects the blood vessels in the lungs and is characterized by increased pressure in the arteries. There are around 30k patients who have been diagnosed with the disease with the average age being around 35 and five different WHO group characterizations of the disease. Today there exist over a dozen approved therapies on the market (~$4.7 billion in sales) that are swallowed, inhaled and injected with UTHR having four of these therapies (~$1.3 billion in sales). The market itself is growing at a +5% CAGR as more patients are identified at earlier times and therapies became used for all stages of the disease and patients are put on more than one therapy. There is a need in the market today for an easy to use inhaled therapy given the current method is provided by nebulizers which have a limited ability to deliver dosage and are unwieldy.

BACKGROUND ON LQDA: Liquidia Technologies (LQDA) went public in July 2018 at $11 a share focused on the commercialization of its proprietary PRINT technology which is a particle engineering platform that they were using to develop two candidates – LIQ861 for the treatment of PAH (Pulmonary Arterial Hypertension) and LIQQ865 for the treatment of post-operative pain. Their lead candidate here is the PAH drug (LIQ861) which is designed to improve the therapeutic profile of treprostinil (Tyavaso) – a drug developed by United Therapeutics –  by enhancing deep lung delivery and offering an easier use form as a dry powder inhaler (in current form this drug is delivered by bulky nebulizers). Its phase III INPSIRE trial showed that LIQ861 could deliver much higher doses of treprostinil then the current nebulized product and deliver overall better performance measures with no safety issues. The FDA accepted their NDA and set a PDUFA for this November 24th.

In early June, UTHR began a patent battle filing an infringement claim on two Tyvaso patents (‘066 and ‘901). This was a move that LQDA had anticipated having already filed for an IPR in March of 2020 (which is a mechanism put in place by the America Invents Act of 2012 that allows for a quicker pathway to dismiss patent litigation). By filing the lawsuit, UTHR triggered a 30 month stay on the FDA final approval (the PDUFA will still happen in November) and set up a claim construction hearing in May 2021 and a trial in March 2022. In late June, LQDA announced the pricing of a secondary at ~$8 a share for total gross proceeds of $75mm and concurrent plans to merge with RareGen, which had acquired the rights to produce the generic of a Treprostinil infusion. RareGen is collectively owned by investor Paul Manning and Roger Jeffs, the prior co-founder of United Therapeutics, both of whom would join the board of LQDA upon consummation of the merger and play active roles.  

After reaching $12 a share, the stock fell following the equity offering and the litigation noise. On October 15th, they announced that the IPR review for one of the two patents (066) had been accepted but the other (‘901) had not – meaning that the patent issue would likely require a more expensive litigation to resolve – and the launch of the drug was pushed to 2022 as opposed to 2021, causing the stock to implode. This set this stage for what happened on October 19th, a headline came across that LQDA was postponing a shareholder meeting scheduled for October 21st to confirm the RareGen transaction and was now evaluating an unsolicited licensing offer.

KEY INVESTING POINTS:

1) The licensing offer is very likely UTHR, which has many compelling reasons to act on the opportunity today.

UTHR and Actelion (a subsidiary of Johnson and Johnson) are the only two companies in the inhaled PAH space, but Actelion does $30mm in sales for its inhaled product while UTHR does +$430mm. LQDA is a threat to UTHR not Actelion, which is more focused on the oral and IV portion of PAH. Thus, the economic logic alone would strongly suggest that the company offering to license the drug is UTHR.

The other relevant thing to note is that UTHR is run by Martine Rothblatt. This healthcare CEO is ferociously competitive. She presumably would not want her former co-founder and business partner, Roger Jeffs, to get ahold of another asset that could attack a key franchise.

Inhalers pose a replacement threat to nebulizers. Rothblatt knows this and has gone on record saying it:

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 with MannKind.

·         CEO of UTHR Martine Rothblatt (3/19/2019)

In recognition of this, Rothblatt struck a partnership with MannKind, which is creating its own inhaler Technosophere (TRET). This effort is currently in a phase 3 trial. That said, there are already some key competitive advantages that LIQ861 has over Technosophere (TreT).

1)      LIQ861 can be stored at room temperature where as Technosophere (TreT) is refrigerated.

2)      LIQ861 can be used from any position where as the Technosophere (TreT) must be held level or it results in loss of drug powder.

3)      LIQ861 has the same warnings/precautions as Tyvaso (the branded drug) while Technosophere (TreT) has additional ones from acute broncospasms and a decline in lung function over time as measured by FEV1 and there is no data yet on the pulmonary function for treatment duration longer than 2 years.

4)      LIQ861 has yet to show a maximum dose where as Technosophere (TreT) has a maximum dose of 150 mcgs.

MannKind should have phase three data out later in November (the data has been delayed by COVID). It is an open label trial which means that UTHR presumably already knows how it is going. If that data is looking less than clean, it would make sense to pivot and acquire/license from LQDA. To this point, the below language is from the licensing agreement between UTHR and MNKD:

“9.2 Termination Events (a)Without Cause. United Therapeutics shall have the right to terminate this Agreement without cause upon 30 days’ written notice to MannKind.”

So if the MNKD Phase 3 data is looking inferior to LIQ861, UTHR can either acquire/license from LQDA and pull the plug on MNKD and still have an inhaler on the market in a few months.

This playbook (beating down a stock price through litigation and then acquiring it) is exactly what Martine used against SteadyMed, which was bought in 2018 for cash and a CVR after getting annihilated by UTHR’s legal tactics.

STDY did not have a competing deal where as LQDA in this case does. The key question then is what would UTHR have to offer to make this a compelling deal that would cause them to walk away from RareGen?

The RareGen deal was struck at $6 a share, which was lower then the secondary pricing at the time of $8. RareGen was bringing a product to the table and two very experienced industry players who know how to build drug companies. A licensing deal (or take out) would have to deliver above those numbers.

As far as potential licensing deals – this is the NPV of a $150mm up front and 15% royalty assuming a base case penetration of Tyvaso.

Even a $100mm upfront payment with a 12% royalty yields a share price of $10 a share.

Given the possibility that an inhaler such as LIQ861 could become standard of care and take over the entire market, there are obviously much steeper upside scenarios from here, especially if Technosphere does not enter the market. This is what a royalty stream would look like without Technosphere and assuming complete displacement of Tyvaso.

 A straight up acquisition at $10 a share would cost $260mm in net cash (given the cash on the balance sheet), a small fraction of their current $2.6 bn cash balance and a small price to pay for maintaining dominance in a key franchise – as well as allowing them to avoid litigation costs going forward. They have until November 13th to strike such a deal. If RareGen does merge with LQDA, then It will be much harder from an anti-trust perspective to acquire the combined company given it will be producing two generics that target UTHR franchises. 

2) Tyvaso (which LIQ861 is looking to unseat) should see its TAM grow a great deal with its INCREASE trials.

The INCREASE Study by UTHR could allow for a potential expansion of Tyvaso’s label to include patients with Group 3 PAH, which is not at all factored into the analysis above and would lead to an exponentially larger TAM for Tyvaso and subsequently for LIQ861. UTHR’s Phase 3 data in the INCREASE study cleared all primary and secondary end points and Martine sounded confident on the earnings call on October 28th, 2020 that this product should launch next Spring.

We remain on schedule to launch our Tyvaso product for IPF associated pulmonary hypertension in April '21, subject to FDA approval on its PDUFA date. We expect to further penetrate that 30,000 patient market for patients with pulmonary fibrosis associated on their hypertension with the launch of our Dreamboat TreT product by the end of 2021 or possibly early 2022.

I'd like to remind everyone that systemic drugs for treating this type of pulmonary hypertension, the pulmonary fibrosis associated pulmonary hypertension are contra indicated leaving Tyvaso as probably the only medicine approved by the FDA to treat this 30,000 patient population. We then expect to greatly expand our pulmonary fibrosis footprint with our TETON study in pure pulmonary fibrosis patients starting in the first quarter of '21.

·         Martine Rothblatt (October 28, 2020)

This is what a potential incremental TAM could look like (depending on penetration) versus roughly $~450mm today.

All this provides further motivation for UTHR to look to protect their franchise.

3) If the deal does not go through, then LQDA will be able to overcome the patent litigation and bring this drug to market.

We would strongly prefer a near term deal with UTHR because it removes the patent litigation and allows for this product to be brought to market quickly and gives us a tremendous near-term IRR. Were such a deal not to occur by November 13th, the stock might trade down but there still would be the incremental catalyst of a successful PDUFA on November 24th (and possibly the elevation of Roger Jeffs to the CEO role following the merger with RareGen).

Why do we think the PDUFA is a slam-dunk? Aside from the fact that 85% of PDUFAs get approved, the reality is that this formulation showed great efficacy, had no side effects, did not reach a maximum tolerated dosage and the FDA is comfortable with the compound having approved multiple other versions of it.

The big hurdle following the PDUFA would be the patent litigation. There are three key facts here that will argue for an eventual dismissal of this litigation.

1)      The patents in question ‘901 and ’066 on which UTHR is filing its infringement claims are a continuation patent of the ‘393 patent that has already been invalidated (SteadyMed succeeded in invalidating it before being bought out).

2)      The ‘901 and ‘066 patents are process patents which are based on purification processes, which generally fail the obviousness standard in light of prior art.

3)      These purification processes involve removing certain trace impurities from the salt. The LQDA process does not remove these impurities – it leaves the trace impurities in the salt. So the process that they claim is being infringed upon is not a process that LQDA actually engages in.

From a non-technical standpoint LQDA seems to be the “good guy”, having developed a drug that is superior to the current treatment options that is being aggressively blocked by an over litigious UTHR. The Obama appointee to this litigation, Judge Richard G. Andrews may have a degree of sympathy here.

At the moment, the FDA approval will likely require the expiration of the 30 month stay (in Oct. 2022) or a resolution of the infringement lawsuit which goes to trial in March 2022 – but for the reasons there in we are confident that they would eventually prevail.

RareGen Merger Valuation:

If we make very conservative assumptions on penetration, we get a cash flow model as below.  

Depending on how you want value the terminal multiple, you get a range of price targets for Liquidia.

This does not account for a potential increase in TAM from the label expansion and assumes a split market with MannKind and that all the current cash is burned to get to market. The take-away here is that with a successful PDUFA in hand and some confidence in the patent litigation, you can get to a much higher share price relative to where we are today.

CATALYSTS:

·         Alternative deal (either licensing or acquisition) is reached by November 13th

·         November 24th PDUFA for Liquidia

·         MannKind Phase 3 Data Release – late 2020

·         Resolution of litigation (if necessary) – late 2021

RISKS:

·         No deal is had with UTHR

While we believe that it makes a lot of sense for UTHR to be motivated to get something done – there is a chance that it is not UTHR and there is a chance that a deal does not come to pass. Assuming it is UTHR, this would still argue for a higher valuation then before because it would indicate that in looking to either license or acquire that UTHR is recognizing that either 1) the MannKind data is weak or 2) their litigation position is weak.

·         PDUFA fails.

If the PDUFA failed here, then this should trade to cash which is roughly $2.50 – there would be no thesis going forward. We believe that this is a low probability event.

·         Litigation is more drawn out.

We believe that they have good standing here but UTHR could look to make this as expensive as possible. This is a key risk in the RareGen merger pathway but we believe that the fact that the patents have already been dismissed and they don’t use the process in question give them a strong ability to negate these patents.

·         MannKind data exceeds expectations.

If the MannKind data is strong then it will come to market with the full heft of UTHR behind it. That said, it is still hasn’t produce a phase 3 result – while LQDA is about to have its PDUFA. So LQDA’s entry might be delayed but it should be coming to market at around the same time as MannKind’s – perhaps even earlier.

CONCLUSION: It has been 10 days since this press release came out, and there has been no subsequent follow up. That is actually a good sign. If this is a compelling deal then RareGen would have five days to offer a counter. In the even that this deal doesn’t happen, the stock may fall back down to $3-$3.50, which is close to cash, but we would have several subsequent catalysts that should boost the stock price. Regardless at $4.50, this is a risk $1.50 to possibly make $5.50 or more kind of a trade. You don’t get many of these especially with such near term potential outcomes.

Catalyst

- liscening agreement / acquisition by November 13th 

- PDUFA on November 24th