LQDA - Anticompetitive Behavior At United Therapeutics

2024-01-02 10:00:00 ET

Summary

• United Therapeutics Corporation calls itself a "Public Benefit" company.
• The reality, it is a cynical monopolist about to lose its monopoly.
• If patent trolling fails, their premium to the entrant could collapse.

Disclaimer .

I recently discussed United Therapeutics Corporation (UTHR) and Liquidia Corporation (LQDA) in my recent article "Anticompetitive Behavior At United Therapeutics, Regeneron, And The FTC":

United Therapeutics

United Therapeutics ((UTHR)) has a monopoly on a treatment for a few types of Pulmonary hypertension. The drug's brand name is Tyvaso and the active ingredient is Treprostinil. They charge from just over $100k to over $350k per year because they can. In capitalism, profits draw competitors the way gazelles draw lions in the Serengeti. But United Therapeutics doesn't want competition. They don't want to compete on price. They could sell their drug for a small fraction of the price but don't.

Their primary protection racket is the Food and Drug Administration, or FDA, whose expensive and lengthy reviews make it nearly impossible for most small market entrants. Only the bigger players can survive their hazing rituals. Big pharma doesn't complain too much because it keeps market shares concentrated. Big government and big business are often a win-win for both, if terrible for their customers.

But in 2020, Liquidia ((LQDA)) was ready to challenge this monopoly by bringing to market Yutrepia, generic inhaled Treprostinil. Their product would be better and cheaper than Tyvaso. United Therapeutics could compete on quality, compete on price, or get the government to help protect their monopoly. They went with the third choice. They filed a lawsuit that blocked Liquidia getting to market by claiming that Liquidia violated two patents, with another claim that the entrant violated a delivery-related patent. These claims were weak, but that didn't matter to United; what mattered was that they could hobble a competitor for years. The process is the punishment. United got monopoly pricing for years at the cost of lawyer bills. This was a great deal for them.

But now it is coming toward an end. After messy and protracted litigation in multiple venues, United is running out of delay tactics. There is around a 60% chance that Yutrepia will get to market by the end of this year [2023] and around a 90% chance by the end of next year [2024]. Today, Liquidia has less than a half-a-billion-dollar market cap. Tomorrow (or more accurately, within the next few years), they could have more than that in Yutrepia sales. This is one of my largest investments based on a rebuttable hypothesis that Liquidia will sooner or later beat United's patent challenges, get to market, and split a $3 billion market as well as get expanded indications for Yutrepia. If that happens, LQDA shares are worth at least twice their current $7.50ish price. I have a high confidence that we get there next year and growing but mild sense that we could this year.

Where should LQDA trade today? Based solely on the value of Yutrepia, fully discounting litigation and timing risk, LQDA should trade at least at $9 today and in the teens by early next year. Beneath $8 is a material discount to its expected value and an actionable opportunity.

I noted that the most cynical anticompetitive actors coopt state mechanisms. Complainers, regulators, and losers form trusts to restrain trade. Examples included Regeneron's (REGN) attempt to disrupt the Amgen (AMGN) acquisition of Horizon ("HZNP"), Sony's (SONY) attempt to disrupt the Microsoft (MSFT) acquisition of Activision ("ATVI"), and United Therapeutics' (UTHR) attempt to disrupt Liquidia reaching its market. My view is that they stand between patients and better care while calling themselves a "Public Benefit" company. The article "How a 'Public Benefit' Pharma Company Undermines Real Innovation" offers more detail on what I consider UTHR 's patent abuse. Regeneron and Sony failed. Both our HZNP and ATVI positions profited from those deals successfully closing. Only LQDA remains public:

Today, United Therapeutics trades at about $220 for a market cap of over $10 billion while Liquidia trades at about $12 for a market cap of around $800 million. One can short UTHR and buy LQDA to capture a market mispricing and misperception about their relative values in the months ahead. It is reasonably likely that LQDA will get final FDA approval in time to get to the market in the second quarter of 2024. This will be a material positive for LQDA's stock which will likely reprice from $12 to the high teens while hurting UTHR's share price. Shorting UTHR against a LQDA long as a pair trade helps mitigate risk from other potential entrants such as Merck (MRK). Of course, always fully understand the risks of shorting as explained here before placing any short trades.

I recently discussed Liquidia in a half hour presentation , "Looking Ahead to 2024 - The Events That Will Unlock Value" in the context of a portfolio of litigation opportunities along with Burford Capital Limited (BUR) and Roivant Sciences Ltd. (ROIV). These, along with Esperion Therapeutics, Inc. (ESPR -) as well as another exclusive to our members and another to be disclosed shortly - make up my half dozen favorite litigation opportunities for 2024. The four disclosed ideas (below) as well as the two not yet public ones did well in December, but each still has a long way to go from here.

Caveat

United Therapeutics Corporation apparently remains hellbent on stopping Liquidia Corporation from reaching the market. They have smart, aggressive lawyers who can stop at nothing to put up every conceivable roadblock. They have succeeded in delays and could delay further than I expect.

Conclusion

Whatever happens to their sector, the spread between the United Therapeutics Corporation and Liquidia Corporation price should converge over the next few quarters.

TL; DR

I own Liquidia Corporation; you might want to as well.

Editor's Note: This article was submitted as part of Seeking Alpha's Top 2024 Long/Short competition, which ran through December 31 . This was submitted before the competition ended, though published afterward. If you are interested in becoming a contributor and taking part in the competition, click here to find out more and submit your article today!

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