LQDA - Liquidia Gains Edge In PAH Market Following Key Legal Victory

2023-12-21 08:00:00 ET

Summary

• The U.S. Court declares United Therapeutics' PAH treatment patent unpatentable, favoring Liquidia in the market.
• Liquidia's modest revenue increase and high R&D and G&A expenses lead to a wider net loss.
• Liquidia has strong short-term liquidity but faces long-term solvency concerns due to its high cash burn.
• Speculative "Buy" for LQDA stock, balancing PAH market entry potential against financial and competitive risks.

At a Glance

In a recent landmark court decision, the biotechnology landscape for pulmonary arterial hypertension (PAH) treatments has been notably altered. The United States Court of Appeals has affirmed a ruling that deems United Therapeutics' (UTHR) patent for treprostinil, a PAH treatment, as unpatentable. This is a major win for Liquidia (LQDA), potentially disrupting the PAH market and opening new competitive avenues. The ruling roots back to a complex patent litigation battle, with implications that stretch far beyond the courtroom. It holds significant repercussions for United Therapeutics' market dominance and Liquidia's aspirations in the PAH market. This article delves into the financial and market implications of this ruling for Liquidia, analyzing its balance sheet, cash flow, market sentiment, and the broader industry landscape. The final investment recommendation considers these multifaceted elements, offering a nuanced perspective on Liquidia's potential in the wake of this decisive legal victory.

Patent Wars: Liquidia's Lung Leap Over United Therapeutics

The recent decision by the United States Court of Appeals upheld the Patent Trial and Appeal Board's (PTAB) judgment, declaring all claims of United Therapeutics' U.S. Patent 10716793 unpatentable. This particular patent, under United Therapeutics' ownership, pertains to the treatment of pulmonary hypertension through treprostinil inhalation. Liquidia challenged the patent's validity, arguing it was obvious over prior art. The Board found the claims obvious, and this decision was upheld on appeal. This development holds considerable implications for Liquidia, effectively invalidating United Therapeutics' patent claims and potentially altering Liquidia's strategic positioning and operational liberties in the lucrative PAH market.

This legal skirmish has a complex background, initially sparked by United Therapeutics' lawsuit under the Hatch-Waxman Act. They accused Liquidia of infringing on their patents, including the '793 patent. In response, the FDA delayed the final approval of Liquidia's PAH treatment, Yutrepia, until the lawsuit was resolved. This landscape shifts significantly in Liquidia's favor with the recent appeals court decision.

This scenario illustrates the complex and competitive nature of patent litigation in the biotech industry, especially for high-value drugs like PAH treatments. The outcome of this legal battle, influenced by both district court and PTAB decisions, is crucial for both companies and could significantly alter the PAH treatment market dynamics.

Liquidia's recent win in the patent dispute is an essential milestone in their quest to enter the PAH market. United Therapeutics reported significant revenue of $326M for Tyvaso DPI and nebulized Tyvaso in the third quarter of 2023, a 26% Y/Y increase. This demonstrates a solid market presence, offering Liquidia an opportunity to establish its product, Yutrepia, in this market. However, Liquidia's market share will depend on various factors, including the timing of Yutrepia's market entry, its effectiveness, pricing strategy, and reception among healthcare professionals and patients.

Liquidia Q3 Earnings

Looking at Liquidia's most recent earnings report , the company's revenue increased modestly Y/Y, from $3.2M in Q3 2022 to $3.7M in Q3 2023, driven by improved managed care adjustments, despite lower sales volumes. However, operating expenses surged notably, with R&D expenses rising from $4.5M to $7.4M and G&A expenses from $6.7M to $10.6M, reflecting a strategic ramp-up in development activities as Yutrepia's commercialization nears. This escalation in expenses resulted in a wider net loss, increasing from $9.1M to $15.8M Y/Y.

Financial Health

Turning to Liquidia's balance sheet , their current assets are $82.98M, with cash and cash equivalents accounting for $76.23M. The company's total assets stand at $111.64M. When juxtaposed against its liabilities, which total $63.64M, including $12.16M in current liabilities, the current ratio is approximately 6.83, indicating a strong short-term liquidity position. However, the presence of noncurrent revenue interest financing payable at $42.11M raises longer-term solvency concerns.

The net cash used in operating activities over the past nine months is $25.58M, equating to a monthly cash burn of about $2.84M. Given the cash and cash equivalents of $76.23M, the cash runway is roughly 27 months. This analysis is based on historical data and might not perfectly predict future performance.

The recent equity offering that raised approximately $25M significantly extends this runway. Nevertheless, the high cash burn rate, juxtaposed with the company prepping for marketization, suggests a medium likelihood of needing further capital infusion in the next twelve months.

In sum, Liquidia's short-term financial health is adequate, bolstered by a strong current ratio and recent capital raise. However, its long-term financial health appears fragile due to substantial noncurrent liabilities and a high cash burn rate.

Market Sentiment

LQDA's market capitalization of $539.31M, despite its small size, could indicate market confidence when considered alongside its high revenue growth prospects according to Seeking Alpha, as evidenced by projected increases from $17.75M in 2023 to $119.19M in 2025. The stock's momentum, outperforming SPY in the 3M and 1Y periods but underperforming in the 6M and 9M frames, suggests a mixed response from the market and stock volatility.

A short interest of 8.50% and 4.18M shares short signify a moderate level of skepticism or hedging among investors.

Institutional ownership at 41.75% with notable positions held by Caligan Partners, Blackrock, and Vanguard, and a net decrease in institutional shares indicate a cautiously optimistic stance among institutions.

Insider trades show a significant net positive activity, with 1,519,935 more shares bought than sold in 3 months and 2,306,254 in 12 months, underscoring insider confidence.

Combining these elements, LQDA's market sentiment can be qualified as "Mixed", balancing the high growth prospects and insider confidence with the moderate skepticism reflected in short interest and institutional positions.

My Analysis & Recommendation on LQDA Stock

In conclusion, Liquidia presents an interesting speculative "Buy" recommendation for investors, albeit with notable reservations. The recent legal victory against United Therapeutics is a significant triumph, potentially clearing a path for Liquidia to enter the lucrative PAH market with its product, Yutrepia (PDUFA January 24). The invalidation of United Therapeutics' patent paves the way for increased competition and market share opportunities, offering Liquidia a foothold in a market with multibillion dollar revenue potential.

Financially, Liquidia exhibits a strong short-term liquidity position, demonstrated by its current ratio. The company's recent capital raise further mitigates immediate liquidity concerns. However, the high cash burn rate, coupled with the looming long-term solvency issues highlighted by substantial noncurrent liabilities, suggests that Liquidia's financial health is uncertain. Investors should closely monitor Liquidia's ability to manage its operational expenses and the progress of Yutrepia's market penetration and acceptance.

The potential for upside exists, especially if Yutrepia successfully captures a significant market share in the PAH treatment space. However, investors must be cognizant of the competitive landscape, ongoing financial pressures, and the possibility of additional legal complexities. Liquidia's journey ahead is likely to be challenging, but with calculated risks, it may offer a rewarding opportunity for speculative investors. The "Buy" recommendation is thus given with a cautious optimism, contingent upon the company's continued strategic execution and favorable market dynamics.

For further details see: