Liquidia - Potential Takeout Valuations
What if Liquidia were acquired? How likely is that?
Personally, I wouldn’t necessarily want Liquidia to be acquired given the potential runway (disclosure: long LQDA, author’s opinion only, see full disclaimer here). Still, if Liquidia were acquired, what might a sensible valuation look like?
Removal Of Legal Risk
Of course, any acquirer may want resolution of the legal case before making a bid. But it seems like that should come soon as we are now 4 weeks after the Supreme Court’s Hikma opinion, which was potentially a gating factor, and an outcome is extremely delayed by any standard assessment and timeline.
Size
There is also a risk Liquidia is now on the larger side for a typical biotech acquisition. Its market cap is currently over $7B (before any acquisition premium) and recent biotech acquisitions over the past few years have generally occurred in the $2B to $14B range, with around $10B roughly the sweet spot. That doesn’t necessarily block a deal, but today Liquidia is looking fairly big to acquire, especially once any potential acquisition premium is factored in and more so if Liquidia continues to execute.
Valuation
Any acquirer would be expected to be a larger pharma firm and could create significant cost synergies (salesforce, corporate costs etc.), so looking at a multiple of sales appears the most prudent way to value the business in an acquisition scenario.
Typically valuation metrics make the most sense when compared to forecast peak sales. That’s because actual price to sales metrics can fluctuate wildly depending on where a company is relative to launch. For example, price to sales multiples of 20x to 35x sales are common in similar recent biotech takeouts, but those only make sense when compared to forecast peak sales for the company in question. Looking at peak sales, acquisitions in biotech often normalize to closer to 4x estimated peak sales.
As such this then makes the question what are peak sales for Liquidia? For now, run-rate sales for Liquidia as of Q2 are $532M (that’s simply 4x the most recent quarterly sales). However, the company appears likely to take share and so at 50% of a $2.5B market today, that’s peak sales of $1.25B (note that the company is already guiding to hitting $1B in sales in 2027).
However, that appears conservative for two reasons, firstly Liquidia may reach ~70% share given its product appears superior, so $1.75B before any market growth. For market growth, we’ve historically seen 25%, but we’ll take that down to 20% as the market is now a little more mature and project out three years to 2028.
In addition, given potential greater efficacy of their products their use-cases may expand to capture more of the PAH market to complement or replace, in part, oral or IV therapies. Plus PH-ILD is under-penetrated today, and that market could grow 10x. Where that ends up is unclear, but it appears highly likely that the market could continue to grow to perhaps 3x its current level with clinical efficacy and strong execution in these adjacent areas. Hence, we arrival at the following take-out multiples:
Current conservative trajectory (50% share of growing market): $2.2B peak sales 2028 - 4x multiple: $98/share
Dominant share (70% share of growing market): $3.0B peak sales 2028 - 4x multiple: $137/share (note: large, but possible acquisition)
Market expansion - $6.7B peak sales 2028 - 4x multiple: $314/share (note: likely too large a transaction at $27.5B for a typical acquirer)
Interestingly, the first two scenarios above correspond to 16x-23x sales so squarely within the range of recent biotech acquisitions. The final “market expansion” scenario would almost certainly have to be achieved organically.
Timing and Fit
Aside from valuation, an acquisition of Liquidia appears less likely perhaps because of the type company Liquidia is. Liquidia’s pipeline is not especially broad and the value lies increasingly in its in-market product. That’s in contrast to many biotech acquisitions that represent a bet on a transformational, if somewhat speculative innovation, or an emerging platform with multiple early candidates, more so than an in-market product.
Now, one asset that Liquidia has here is its PRINT particle sizing technology. However, this hasn’t shown itself to be broadly applicable yet beyond Liquidia’s use case, in the sense that it could drive broader change in healthcare. In addition, Liquidia is also becoming larger than the typical pharma acquisition, especially once acquisition premia are built in.
In a sense, I think this is good news. The challenge with any great compounder is that a take-out, though good in the short term, can serve to cap your upside, as you lose the ability to just own the stock for the long-term once it is acquired. However, the takeout scenario may offer a degree of downside protection, if Liquidia were to fall on potentially a bad legal outcome, or a change in market sentiment, then a takeout may become more viable.
Final Thoughts On Valuation
Although this is primarily looking at takeout scenarios, Liquidia’s valuation is now a little more demanding despite it’s recent execution. It appears the market has largely priced in a successful launch at this point which equates to ~50% market share, and is also downplaying potential legal risk, which may be low, but is not zero. In order to see further upside from here, Liquidia must:
Continue to take share from United Therapeutics as it is doing consistently.
L606 should ultimately progress in a way that least maintains Liquidia’s competitiveness relative to Insmed and United Therapeutics in future years.
Avoid an extreme legal scenario, such as being meaningfully blocked from the PH-ILD market or excessive royalties.
Then for another material step-up in valuation, Liquidia must move from market share gains to full-on market expansion in terms of serving new PH-ILD patients at scale and/or supplementing/augmenting existing IV or oral therapies for PAH.
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