Arquitos Capital Management commentary for the first quarter ended March 31, 2024.
Dear Partner:
Arquitos returned 19.4% net of fees in the first quarter of 2024.
Performance was led by our investments in Vistry and Liquidia, up 34% and 23% respectively. Liquidia is now our largest investment.
Read more hedge fund letters here
I put off writing this letter in the hopes of providing a resolution on Liquidia’s legal battles. I expected the company to come to market with their Pulmonary Arterial Hypertension (PAH) drug in April. This launch has been slightly delayed by heroic legal efforts from their competitor, United Therapeutics (UTHR). Heroic may not be the correct word when looking at the situation from our perspective, but you have to tip your cap to UTHR’s shamelessness to protect the monopolistic profits they make from their PAH drug.
Arquitos Performance Since Inception
We should have significant, market moving news from Liquidia in the next week or two. I would be happy to provide additional thoughts then. Just let me know if you would like an informal update.
Liquidia has two hurdles to meet in order to launch. Both are nearly guaranteed to happen, it is just a matter of when. Liquidia needs to receive final FDA approval for its drug, Yutrepia. The FDA previously granted preliminary approval in 2021, meaning that Yutrepia has met all regulatory standards for quality, safety, and efficacy for approval.
The FDA initially provided a goal date of January 2024 to provide this approval. However, UTHR took the unprecedented step of suing the FDA to attempt to prevent approval. This gambit is assured of failure, and in fact the temporary restraining order requested by UTHR has already been denied. But, this approach does accomplish an important goal for UTHR, to slightly delay Liquidia’s launch of Yutrepia. Every month matters when UTHR has a monopoly.
The other hurdle is a new UTHR attempt at a preliminary injunction at the District Court level for a different patent. This attempt will also almost surely fail. The judge has already heard the arguments and is expected to rule against the preliminary injunction early next week.
This new injunction attempt comes on the heals of the District Court’s removal of the injunction in the original patent litigation. That background is below:
“Liquidia won its case at the Federal Circuit Court in December affirming the earlier Patent Trial and Appeals Board ruling, there is a parallel case at the district court level. That district court case was dependent on the Circuit Court result, and the injunction in place now needs to be reversed. This is a mere formality as the circuit court decision overrides the district court decision. Liquidia moved to set aside the district court decision on December 26, 2023.”
That injunction at the District Court level was removed on March 28. Of course, UTHR has appealed and filed two additional lawsuits seeking new injunctions. It is clear that even UTHR knows that these will be denied and are doing it solely for the sake of delay.
I was hoping to report back a resolution in this letter and celebrate a much higher share price. For now, we will need a little more patience. We will have the new injunction possibility cleared out early next week and we may receive the FDA final decision next week as well. At that point, Liquidia can finally launch Yutrepia.
Then the question is how successful Yutrepia will be in the marketplace. While that is a deeper discussion for when we have a little more sales data, we can point to how absolutely terrified UTHR appears to be. Their legal tactics have gone beyond what would even be described as hyperaggressive. UTHR sued its regulator with a sure to lose argument. They have been so aggressive in their tactics that it has caught the attention of Congress and may lead to patent reforms to prevent these delaying tactics in the future from other drug companies. Furthermore, UTHR leadership have been active and aggressive sellers of their own stock over the past year. Clearly, UTHR sees Liquidia as an existential threat.
When I first got involved in Liquidia a few years ago, I thought they were a buyout candidate. They had, in fact, previously received and rejected what was an attractive offer. As time went by and I saw the infrastructure that CEO Roger Jeffs was building, it appeared to me that he wanted to build a lasting business with several product lines based on the company’s patented PRINT engineering technology.
While I still believe that to be true, I’ve come back around to the idea that another buyout offer is not off the table. Several complementary PAH therapies are coming online in the near term which enhance Liquidia’s position. Specifically, Merck’s new drug, Winrevair, is designed to be used in conjunction with an inhaler product like Yutrepia. It is not unrealistic to believe that Merck would want to build out an entire PAH drug portfolio by going after Liquidia. To be successful, though, I think we would need to see a Godfather offer.
Thank you again for your commitment to Arquitos. I will be at the Berkshire Hathaway annual shareholder meeting in Omaha on May 3 - 5. If you happen to be around, please let me know. I would love to catch up in person.
Best regards,
Steven Kiel
Arquitos Capital Management
