Arquitos Capital Management commentary for the fourth quarter ended December 31, 2024.
Dear Partner:
Arquitos returned 29.6% net of fees and expenses in 2024, compared to 25.0% for the S&P 500.
I am as confident as I have ever been in the potential for our top four positions to perform exceptionally well in 2025. Please find my commentary on each of them below.
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Finch Therapeutics (FNCH)
I teased a new investment in last quarter’s letter without revealing the name. I have completed our purchases and can share that the investment is Finch Therapeutics. Finch currently makes up about 7% of the portfolio.
Finch won a jury trial in August against Ferring Pharmaceuticals where it was found that Ferring violated three of Finch’s patents. The jury awarded Finch a one-time licensing fee and pre-trial interest totaling approximately $30 million, as well as future royalties to be determined by the judge. Finch is also entitled to post-trial interest.
Additionally, and importantly for our analysis, the jury found that Ferring had willfully infringed the patents. This opens the door to enhanced damages up to three times the jury award. On average, awards are multiplied by a factor of 2.2x in patent cases where the jury finds willful infringement. The judge will ultimately determine this in their post-trial decision. The judge is not obligated to enhance damages based on the jury decision, but it is certainly helpful.
On timing, the final post-trial briefs were submitted in November. The judge now has to set a post-trial hearing. We are expecting the announcement of that hearing date any day now. Once the post-trial hearing occurs, the judge will issue a final decision a few weeks to a few months after the hearing. Given that it is already mid-January, I am hopeful for a decision by the end of the first quarter. Unfortunately, the courts don’t follow our timeline, so some patience is required.
Why hold shares now when we may not see a decision for another two months plus? There is always an outside chance that the parties reach a settlement agreement. Working in that favor, the chances of enhanced damages for Ferring is high, which may compel them to attempt to settle at a number between the current jury award and the potential final decision. Working against a settlement is that there will almost surely be an appeal. This would add years before a final payout and allow for the potential for the decision to be overturned. If Finch wins on appeal, though, they would be entitled to post-trial interest and potentially the grant of attorney’s fees. Those numbers would be large.
Finch is still in a strong position on appeal. For reference, the Federal Circuit affirmed 75% of the final decisions of the district courts in 2023.
While I may decide to hold some of our position longer term, my play is specifically on the post-trial decision and the potential for shares to trade significantly higher on an increased award for Finch. I believe the downside is limited as the odds that the judge will overturn or reduce the jury award is low. The upside is material given the circumstances.
Finch Therapeutics was an early pioneer in the microbiome field. It holds several patents related to the transplantation of microorganisms from healthy individuals to individuals in need. Finch is no longer attempting to develop products and is solely focused on defending its patent portfolio. Finch’s current market cap is less than $20 million.
The items to be decided by the judge are as follows:
- An-as-yet to be determined royalty rate on the future sales of the drug that relies on the infringed patent. The present value of this award will likely be between $10 million and $20 million, though it could be higher, perhaps significantly so, depending on sales revenue.
- As I mentioned, there is a significantly higher than usual chance that the judge will grant enhanced damages. This could double or triple the original $25 million jury award. With interest, this could add $30 million to $60 million to the award.
- Attorney’s fees may also be granted. This amount could be in excess of $20 million, though it will not be determined until all appeals are exhausted. This part of the decision will likely take years.
Finch has about $10 million in net cash and limited operations. They have some lease obligations and would owe some money to the university where the patent was developed if the award goes above a certain level. They also have tax loss carryforwards which would shield the award from federal taxes.
Taking all of this into account, the possible outcomes range from approximately $25 per share on the low end to more than $75 per share on the high end. If there is not a settlement, I do not expect shares to trade all the way up to these levels given the timing and uncertainty of an appeal. However, I do expect shares to trade closer to their fair value than they trade today simply because of the post-trial certainty. I would be highly surprised if shares are not at least a double from here, and more if enhanced damages are granted.
Liquidia Therapeutics (LQDA)
Liquidia was a major drag on the portfolio in 2024. While shares were relatively flat on the year, our call options cost the overall portfolio more than 10%. Given the optimism I had going into 2024, that loss particularly stung.
Going back to our original purchase, Liquidia has won each patent dispute it has had with its competitor, United Therapeutics (UTHR). Liquidia had preliminary FDA approval to launch in 2024 and shares surged earlier in the year in anticipation. We were positioned very strongly to benefit from that launch.
In a truly shocking decision in August 2024, the FDA granted UTHR a backdated three-year regulatory exclusivity for their inhaler treprostinil product, Tyvaso DPI. This exclusivity expires on May 23, 2025. Along with that decision, the FDA confirmed that Liquidia’s application has met all other FDA requirements.
After all these years, the final impediment for Liquidia to launch its inhaler product, Yutrepia, is that FDA final approval in late May. I expect the launch to be very successful and for shares to react strongly. I also believe there is a high chance for a buyout offer within the year. We have exposure to the upside now, and I hope to increase the size of our position as we get closer to final FDA approval.
Liquidia’s recent presentation at the J.P. Morgan Healthcare Conference demonstrates why Yutrepia should dominate the marketplace for the treatment of PAH and, especially, PH-ILD. Several years ago, CEO Roger Jeffs said that he believed Yutrepia could take 80% to 90% of the market. That seemed like hyperbole at the time but given the results of Liquidia’s clinical trial that was presented at the conference, I now understand why he believes that. It appears that Liquidia can also grow the market due to patients staying on the treatment longer as Yutrepia extends their lifespan, and by providing relief to a high number of patients who have not been able to be effectively treated by UTHR’s nebulizer product, Tyvaso, or its inhaler product, Tyvaso DPI.
Looking at PAH first, it is estimated that there are 100,000 addressable patients, with 45,000 of them in treatment. Of these, approximately 18,000 patients are treated with prostacyclin. Treprostinil is a synthetic version of prostacyclin. It works to relax pulmonary and systemic blood vessels, reducing blood pressure in the pulmonary arteries. Treprostinil is a generic drug, so the differentiating factor is the manufacturing process and the delivery system.
Depending on the progression of the disease, patients are treated with an oral prostacyclin, via IV or injection, or through a nebulizer or inhaler. The side effects for oral and IV/injection can be significant, so an inhaled product is preferrable if effective. Currently, approximately 1,500 PAH patients use a nebulizer and 2,500 use an inhaler. There are 6,000 new starts annually. 30% of these patients discontinue or change treatment. These new starts and their discontinuation are why Liquidia’s Yutrepia launch is different than other drug launches. There is a significant number of new patients whose doctors will start them with Yutrepia given the clinical study data. It is not necessary to switch patients from Tyvaso to gain significant market share, though I think that will also happen over time.
For the inhaler product, the primary problem is that Tyvaso DPI does not reach the deep lung effectively. Patients may have excessive coughing and discomfort because not enough of the treprostinil is making it to where it need to be.
For PAH, Tyvaso, UTHR’s nebulized product, generally doses at 7 to 9 breaths per session (bps). Studies have shown that if bps can be increased from 9 to 12, patients can delay the transition from inhaled products to IV/injections from 9.5 months to 18 months.
This is where Liquidia’s YUTREPIA has a significant advantage. YUTREPIA delivers the equivalent of 33 bps compared to Tyvaso and Tyvaso DPI’s 9 to 12 bps. That increased effectiveness is staggering.
Liquidia’s patented PRINT technology is the game changer. This manufacturing process dramatically reduces the size of the treprostinil particle and ensures a uniform shape. This has two benefits. It allows the drug to be deposited deeper in the lung, and it allows for the use of a low effort inhaler, which is easier for patients with degraded lung function to use.
For PH-ILD, Yutrepia appears to be even more attractive. It is estimated that there are 60,000 PH-ILD patients with 6,000 of them treated in the first 3.5 years. More than 21,000 PH-ILD patients are not currently being treated. While PAH has a variety of treatment methods, PH-ILD only has inhaled products, either a nebulizer or inhaler.
Like PAH, higher bps translates into better patient outcomes. 10-12 breaths translate into a nearly 34% improvement in their six-minute walk test. In its ASCENT trial, Yutepia is dosing at the equivalent of 27 bps. There have been no discontinuations through 8 weeks in this trial and only mild cough reported as a side effect. CEO Roger Jeffs’ describes this clinical trial data as “dream data.”
Compare this date to Tyvaso DPI. An impartial, third-party study found that Tyvaso DPI had high discontinuation rates. Out of 26 PH-ILD patients who had never previously been treated, 18 discontinued due to clinical worsening and side effects. The median dropout period was 40 days.
For 22 PH-ILD patients transitioning to Tyvaso DPI from the Tyvaso nebulizer in the study, 11 discontinued due to clinical worsening and side effects with 7 going back to the nebulizer and 5 discontinuing treatment altogether.
If these studies translate into the real world, the market opportunity for Liquidia is enormous. The current revenue run rate is nearly $1.7 billion annually for competitor products Tyvaso and Tyvaso DPI. Revenue has increased 4x over the past five years. Liquidia’s Yutrepia has an opportunity to become the prostacyclin of choice for new patients as well as patients who are struggling on UTHR’s current products.
Liquidia’s current market cap is a little over $1 billion. There may be some volatility in shares over the next few months, but once Yutrepia comes to market and demonstrates what type of market share they can capture, shares should trade at many multiples higher than today.
Nam Tai Property (NTPIF)
Nam Tai makes up approximately 8% of the portfolio at year end. Shares were flat on the year at $4.75 despite material progress being made at the company. In fact, shares have traded 25% higher in 2025. I expect more as the year progresses.
In December the company announced several positive developments. They obtained full control over all of the company’s onshore assets, corporate seals, and business licenses in China. They also reached a settlement with the former controlling shareholders, Greater Sail and Kaisa Group. Nam Tai had obtained access to the “chops” in 2023, but it was my understanding that Kaisa continued to withhold key access to bank accounts and other items and generally continued to harass Nam Tai’s management and lenders. All of that has now ended. This allows Nam Tai to gain access to funding sources and will now allow them to repair their banking relationships.
Nam Tai also reached a settlement with Credit Suisse/UBS over previous losses to their supply chain fund, an investment that previous management made during the proxy contest several years ago. The company also reached a settlement with West Ridge, who was a party to the 2020 PIPE investment into the company. Nam Tai still needs to get current with its financials and complete an audit. This will likely take some time.
Absent current financial information, we are in the dark on their current financial condition. However, we do know that their real estate was valued at $30 to $40 per share only four years ago. A colleague of mine on the ground in China recently looked at comps for each of Nam Tai’s projects and still got a valuation of $32 per share. That may or may not be optimistic, but it is a large margin of safety compared to today’s stock price. It is worthwhile seeing what else materializes this year for the company.
ENDI Corp (ENDI)
ENDI is our largest position by a wide margin. I remain confident in the company and its leadership and urge you to review their 2024 annual financial report when it comes out in late March/early April. Out of all of our investments, ENDI allows me to sleep the most soundly. It is unique to feel that way about a company that also has the share appreciation potential of ENDI.
Other Positions
I closed our positions in Pendrell and Lifecore earlier last year in order to reallocate that capital. We continue to hold a position in Vistry and in a small liquidating biotech. We also have a small position that allows us to synthetically short MicroStrategy (MSTR). I view the latter position as a hedge on the overall markets in addition to a view on the MicroStrategy specifically.
On taxes, I expect our administrator to deliver the K-1s in late March.
For our audit, you may receive communications and verification requests from Wipfli as they perform their work. The sooner you complete and return these items, the sooner we can receive the fund’s final audit. I appreciate your cooperation. If you have any questions about any of these items, please let me know.
Thank you again your commitment to Arquitos, and best wishes for 2025!
Best regards,
Steven Kiel
