MNKD - Liquidia: Ready To Start A Stream Of Revenue For Investors

2023-06-23 13:40:23 ET

Summary

• Liquidia and MannKind are competing to secure the most significant revenue stream for their respective PAH drugs, both containing the active ingredient Treprostinil.
• Liquidia's stock has increased by 96% in the past year, while MannKind's stock has ranged between $2.91 and $5.93, indicating Wall Street's preference for Liquidia's product.
• The legal battle between Liquidia and United Therapeutics over patent infringement has delayed FDA approval for Liquidia's PAH drug, but a resolution is expected by early 2024.

We are fast approaching the first anniversary (6-29-2022) since I shared an article where I compared Liquidia's (LQDA) PAH drug to MannKind's (MNKD) PAH drug, with both products having the same active ingredient-Treprostinil, in a respective inhaled formulation. The article was titled - Liquidia vs. MannKind: Treprostinil Is the Big 'IF'

The conclusion I made in my article and who would win this battle to secure the most significant revenue stream was Liquidia. In the ensuing 12 months, we haven't seen a clear-cut winner since MannKind's partner and owner of the drug, United Therapeutics ( UTHR ), has continued to battle in court the issue of whether Liquidia has breached their patent for the exclusive use of Treprostinil.

On November 8, 2021, the FDA gave Liquidia tentative approval for their PAH drug, now known as YUTREPIA . This tentative approval was based on Liquidia resolving the patent issue with United Therapeutics. This legal battle has prevented the FDA from confirming that Liquidia can launch its version of the PAH drug into the marketplace. But in the interim 12 months, we have seen strong indications of how this battle will play out; we now can see the finish line approaching no later than early in 2024. However, there is also an opening for resolving it before the end of 2023. But one metric, which is how Wall Street perceives the end resolution, the valuation of Liquidia's stock vs. MannKind, leaves little to ponder what will happen when ultimately Liquidia will be cleared to launch their product.

52 weeks and a Partial Verdict Scenario:

When my June 2022 article was published, Liquidia's stock was trading at $4.40. As I began writing this article, the stock is trading at $8.63 a share-a tidy increase of 96%. Looking at the comparable 52-week period, from June 2022 to June 2023, MannKind's stock has ranged from a low of $2.91 to a high of $5.93, with the stock being traded today (6/16/2023) for $4.09. One must remember that MannKind's version of Tyvaso DPI has been on the market for a year. In contrast, Liquidia's DPI version is still prevented from entering the market due to patent issues needing to be resolved. For an investor, seeing a stock trading 100% higher than your significant competitor's stock clearly shows the market's sentiment for which product they expect to garner the most revenue. And for Liquidia, based on three potential scenarios for resolving the patent issue, the outer date is in the first half of 2024.

Based on this first half of 2024 resolution time frame, with this article, I will update the relevant information that has transpired since my previous article. I will concentrate on issues that are mainly relevant to Liquidia's undertakings .

Dr. Roger Jeffs Arrives on the Scene:

In 2016, after spending 18 years working for United Therapeutics while serving as CO-CEO, Dr. Jeffs was at the end of his association with United. These years with the company it has involved him in every aspect of creating the foundation and subsequent growth for the company to its status as a $10 billion market cap company. This growth was based mainly on one asset-Treprostinil, made available through every feasible way to dose the drug into a needy patient's body to remediate the medical issue caused by PAH.

Upon leaving United, Dr. Jeffs created a small new biotech company, RareGen. RareGen aimed to develop a generic version of Remodulin, a Treprostinil-based drug delivered by a pump subcutaneously ((SC)). The other option is intravenously ((IV)) via a catheter implanted into a vein in the chest area.

In 2019. RareGen partnered with Sandoz, a division of the $50 billion revenue corporation Novartis (NVS). The goal was to create a generic form of Treprostinil that could be delivered subcutaneously and intravenously.

On June 29, 2020, Liquidia announced they were purchasing RareGen, where Dr. Jeffs would join the Liquidia board of directors. Then on January 3, 2022, Dr. Jeffs became the CEO of Liquidia.

In May 2021, Sandoz announced that the FDA had given tentative approval for their generic Treprostinil drug. At this stage of Dr. Jeffs' efforts to compete directly against United's product---the two CEOs were now in a full adversarial mode for who would win this battle for Treprostinil. Modern business principles show that when CEOs go public and attack a competitor's product as inferior to theirs, this could be a wrong decision. An excellent example of such can be seen in the 1stQ-2023 report, where United Therapeutics' CEO spoke out about what was perceived as a weakness to Liquidia's pending PAH drug, YUTREPIA.

On May 6th, Dr. Jeffs, during their 1stQ conference call, gave his rebuttal to United :

"Finally, I want to briefly address a comment that was made by United Therapeutics in its earnings call yesterday in which they compared admitted dose calculations between YUTREPIA and Tyvaso DPI. This is a red hearing. Patients and physicians don't care about admitted dose calculations. They only care about the actual dose received. As confirmed in our registration studies and validated by the FDA and their granting of tentative approval, YUTREPIA reliably and precisely delivers doses to patients that are comparable to all of the treprostinil doses in the Tyvaso DPI level as well as doses above and beyond those that are in the Tyvaso DPI label. Patients also care about the comfort and usability of the treatment, and we believe that our low-resistance device, its ease of use and robustness will be strongly favored by patients and their providers."

As part of any discussion concerning the delivery device of YUTREPIA, it should be noted that Liquidia inked a long-term contract with Plastiape SpA, a part of Berry Corporation (BERY). They are an international operating corporation with 45,000 employees. Their Plastiape division can create an inhaler for a drug development company that best fits their needs in delivering a drug to a patient's lungs.

"Liquidia Technologies entered into a Supply Agreement with Plastiape SpA,

6:32 AM ET, 06/09/2023 - Briefing.com

Pursuant to the terms of the Agreement, Plastiape will manufacture, sell and deliver to the Company dry powder inhalers that are used for the administration of YUTREPIATM, the Company's investigational, inhaled dry powder formulation of treprostinil, during the Term (as defined in the Agreement). At least two (2) months prior to the beginning of each calendar year during the Term (as defined in the Agreement), the Company will provide Plastiape with a non-binding written forecast of the Company's expected requirements for the quantity of the Product during the following twelve (12) months. The Company is not required to purchase any specific amount of the Product under the Agreement, except for the quantities which the Company actually orders through binding purchase orders.

The Liquidia-Sandoz Partnership and Revenue Stream:

Treprostinil injection is the first-to-file, fully substitutable generic treprostinil for parenteral administration. Treprostinil injection contains the same active ingredient, same strengths, same dosage form, and same inactive ingredients as Remodulin® (treprostinil). It is offered to patients and physicians with the same level of service and support but at a lower price than the branded drug. Liquidia PAH promotes the appropriate use of Treprostinil Injection for treating PAH in the United States in partnership with Sandoz, Inc., which holds the Abbreviated New Drug Application ((ANDA)) with the FDA.

Liquidia Revenue Stream:

2020: $0.7 million

2021: $12.9 million

2022: $15.9 million

2023: 1st-Q results: $4.5 million

One must remember that these numbers are based on net revenue, where they are now split 50/50 between Sandoz and Liquidia. Suppose you extrapolate the $4.5 million from this latest 1Q report. In that case, that will mean that Sandoz and Liquidia netted $9.0 million, and for the entire year of 2023, this translates to $36.00 million net dollars. Assuming that the net expenses were half of the gross revenue for their product, the Liquidia/Sandoz product is taking $72 million from the gross income of United's Remodulin product. This is evidenced in United's 1stQ-2023 , where they cite that their Remodulin net revenue dropped from $131.7 million in the same period in 2022 to the current $121.4 million-a decline of $10.3 million in net revenues for this one product.

Revenue was $12.9 million for the year ended December 31, 2021, compared with $0.7 million for December 31, 2020. 2021 includes a full year of revenue related to the Promotion Agreement following the acquisition of Liquidia PAH in November 2020. Revenue is net of $2.7 million in amortization of the contract acquisition costs associated with the Promotion Agreement with Sandoz

Revenue was $15.9 million for the year ended December 31, 2022, compared with $12.9 million for December 31, 2021. During the year ended December 31, 2022, the split profit percentage we received under our Promotion Agreement with Sandoz Inc. was 50%, whereas during the year ended December 31, 2021, the profit split percentage decreased from 80% to 50% as a result of achievement of predetermined cumulative sales thresholds. An increase in the number of units sold offset this decrease in profit split percentage. Revenue in 2022 is net of $2.7 million in amortization of the contract acquisition costs associated with the Promotion Agreement.

United Technologies 2022 Annual Report:

The following are the comments found in United's 2022 Annual Report, which outline the situation related to their efforts to thwart Liquidia from getting their version of Treprostinil cleared by the FDA.

"793 patent : In August 2021, the PTAB instituted IPR proceedings related to this patent . In July 2022, the PTAB issued a final written decision finding unpatentable all claims of this patent. We filed a request for rehearing and for precedential opinion panel review . On October 26, 2022, the PTAB denied our request for precedential opinion panel review, but "determine[d] that the Board's Final Written Decision did not address adequately whether the [references relied upon as the basis for canceling claims] qualify as prior art." Thus, the PTAB directed the original panel "in its consideration on rehearing, to clearly identify whether the … references qualify as prior art." The original panel issued its decision on our request for rehearing on February 2, 2023. The original panel agreed that it had overlooked our arguments and its rationale for determining that certain references are prior art was erroneous. Nonetheless, the original panel determined the references qualify as prior art under a new rationale.

Thus, the original panel maintained that the claims of this patent are not valid. We have until April 6, 2023 to appeal. All claims of this patent remain valid until any IPR appeals are exhausted . Liquidia could obtain final FDA approval for its proposed product prior to May 2027 in two circumstances: ( 1) Liquidia could prevail on appeal, either from the district court judgment or IPR proceedings, such that its product is not found to infringe any valid claims of our patents; or (2) the district court or appeals court could stay the district court order barring FDA approval of its product during the pendency of its appeals. Liquidia has filed a motion with the district court to stay the bar against final FDA approval, and that motion is fully briefed and pending. For further details, please see Note 14-Litigation, to our consolidated financial statements.

Liquidia Response in Recent 1Q-2023 Report:

"As a reminder, the company is an active party to two separate ongoing appeal proceedings at the Court of Appeals for the Federal Circuit, either of which could open the path to final FDA approval of YUTREPIA, if ruled in Liquidia's paper. Broadly speaking, the appeals relate to two patents asserted by United Therapeutics, the 066 patent, and the 793 patent. The first and most advanced ongoing appeal proceeding relates to the District Court's decision last August in the Hatch-Waxman litigation. In this proceeding, UTC is appealing the district court's ruling related to the 066 paten t, which found 5 of the 6 asserted claims of the 066 patent are invalid and that the remaining asserted claim is not infringed by Liquidia. And Liquidia is appealing the District Court's decision with respect to the 793 patent, which found that all the claims were valid and infringed by Liquidia based on the arguments that were presented during the Hatch-Waxman litigation. Yesterday, the Federal Circuit conducted oral arguments in this appeal. The majority of the argument time was spent addressing Liquidia's appeal of the district's decision with respect to the 793 patent with only a few questions from the judges in a couple of minutes spent on UTC's appeal of the District Court's decision with respect to the 066 patent. Although it's premature to speculate as to the outcome of the appeal, we hope to receive a decision from the court in the next few months.

A second ongoing appeal proceeding was initiated by United Therapeutics in April after the PTAB rejected their rehearing request and reaffirmed its previous decision, which found that all of the claims in the 793 patent were un-patentable . We currently anticipate that briefing in this appeal will conclude by the early in the fourth quarter and expect oral arguments to be scheduled either late this year or in the first half of 2024 . We will not know the scheduled date for oral arguments until after the briefing is complete. Once argued, we would then anticipate that the decision could be rendered by the court as early as a few days after oral argument if the court issues the summary affirmants or within a few months after oral argument of a full written opinion is issued. When these appeals are taken together, if all of the original decisions are affirmed on appeal, then we will be clear to seek final approval of YUTREPIA .

My laymen's interpretation of these two separate lawsuits is for patents where one is identified as patent 066. The second case deals with patent 793.

United Therapeutics 2022 Annual Report states the following about Patent 793:

"In July 2022, the PTAB issued a final written decision finding unpatentable all claims of this patent." - "On October 26, 2022, the PTAB denied our request for a precedential opinion panel review."

As for patent 066, we can look at what Liquidia stated in their recent Q1-SEC filings:

"The first and most advanced ongoing appeal proceeding relates to the District Court's decision last August in the Hatch-Waxman litigation. In this proceeding, UTC is appealing the district court's ruling related to the 066 patent, which found 5 of the 6 asserted claims of the 066 patent are invalid and that Liquidia does not infringe the remaining asserted claim."

At this stage, the litigation approach being undertaken by United has not been favorable for either patent that they are seeking to enforce against Liquidia. So now United is seeking to extend the legal part by appealing their case for both patents. Each day they can extend the appeal process, which leaves United with no competitor, and their product revenue continues unabated.

United Therapeutics has been a highly successful company. Their CEO runs a tight ship, and the CEO is very proactive. The problem with United is that they have one drug, Treprostinil, delivered to the patient with a nebulizer, plastic inhaler, oral pill, and by injections. The Sandoz/Liquidia, a generic injection product, reflects how the United revenue stream can be impacted.

One can look at the YTD performance of United's stock as anecdotal evidence. The most recent 52-week price of the stock has been $283.00, and currently, the stock is trading at $223.00. This represents a decline of $60.00. This decline corresponds to a market capitalization loss of more than $2.0 billion. This massive decline occurred when YTD, the S&P 500 index, gained 14%. Based on this performance, it appears that Wall Street might be expecting some erosion from the historical level of growth that United has been achieving.

Financials for Liquidia:

Liquidia is a $600 million market-capitalized company. At the end of the 1st quarter of 2023, they reported cash and cash equivalence of $94.4 million. Their CFO commented:

"From a financial perspective, the company has never been stronger. The combination of cash on hand and access to future funds through our revenue financing agreement provides a solid foundation to build our presence in the PAH community. We have recently initiated a hiring effort to support our commercial and medical affairs teams. At the same time, our operations team continues to ramp production of commercial inventory and will be prepared when we get the green light to launch YUTREPIA."

On January 9th, 2023, Liquidia was most fortuitous in the luck category when they announced they had entered into a Revenue Interest Financing Agreement with Healthcare Royalty for a total investment potential of $100 million. From the first tranche of funding, $32.5 million, Liquidia paid off their loan from Silicon Valley bank, amounting to $22.3 million. For those who remember our banking crisis from earlier this year, the carnage started with this bank that eventually failed, and First Citizen Bank now owns its assets.

Caveats

The primary and current warning issue is that Liquidia must get final clearance on the patent issue related to United Therapeutics. The longer the delay works in United's favor. But whatever, the patents will eventually expire. Investing at the current level depends on when Liquidia will resolve the patent issue.

Sadly, the PAH market and the variety of indications for these diseases are growing worldwide. United Therapeutics has the most widely used drug to treat this disease. With no competitors, United has been able to charge an exorbitant price for their Tyvasso DPI drug. Drugs.com reports that the price they charge is a little over $23,000. Such pricing has caught the attention of other drug companies and their internal development programs. One must remember that PAH is a progressive disease where treprostinil mainly expands the veins in the heart and lungs to keep them open to transport oxygen to the body. Treprostinil does not cure the disease. As stated, it is a progressive disease even when treprostinil is being used. The point is, other companies are attempting to validate and eventually get FDA approval. Investors need to be aware of the issues and the ongoing development programs that could change the playing field for their investments. The best article available to address this complex issue is the March 2023 article in the NIH publication -- "New Drugs in Pulmonary Arterial Hypertension."

Conclusion

Over recent days I have added shares at the average price of $8.32. At the end of trading on June 21, 2023, the stock closed at $9.41. Looking at the future, I see the potential of Liquidia getting a resolution within the next few months or no later than mid-2024. Looking at the maximum time frame for resolving the patent, we are looking at 12 months. Based on getting the FDA clearance, I'm putting a stock price for Liquidia at the median price of $15.00. Seven analysts have a 12-month price forecast with a median price target and a high price of $20.00. The lowest estimate is $3.00. By using the $15.00 price and the current price is $9.00, this reflects a potential gain of about 65%

These are the significant factors for Liquidia obtaining a major share of the treprostinil market.

• Liquidia's PRINT manufacturing process will give them a better COG ratio for their finished drug. The manufacturing process offered by MannKind is a more complex and lengthy process for creating their DPI product. Liquidia will have a considerable advantage in pricing YUTREPIA below the price for Tyvasso DPI. Drug prices have become a significant issue for drug companies and consumers.
• Dr. Roger Jeffs brought impressive results from building out United's revenue stream. He is now utilizing that experience to create a significant competitor to United's dominance. During this waiting period, Dr. Jeffs is taking advantage of having Key Opinion Leader ((KOL)) meetings with those participating in the PAH medical care area.
• Liquidia has built up its inventory for Yutrepia and is ready for an immediate launch upon getting the pending FDA approval.

Based on the outer date mid-2024, I plan to allocate funds monthly to my LQDA position. This goal will be done with funds from dividends or reallocated from current stocks in my portfolio. With the shares, over the last week, hitting a new 52-week high of $9.50 on massive volume, I would suggest new investors obtain a core position, then set up a plan to income average over the coming months if it takes going to mid-2024 for the patent issue being resolved.

My article should be used as a starting point for you to do your due diligence based on your criteria for investing your capital.

Good luck with your future investing decisions!

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