Arquitos Capital Q1 2026 Investor Letter

Dear Partner:

Arquitos returned -7.2% net of fees in the first quarter of 2026. Individual returns will vary based on timing of investment. Please check your statement for specific results.

Liquidating Biotechs and Biopharmas

In the first few years of running Arquitos, a popular special situation theme involved distressed companies from the financial crisis. The company was being restructured. Subsidiaries were sold off, closed, or put into some sort of runoff. Sometimes the end goal for the company was liquidation.

Investors often misunderstood the value that was left over from these situations. In some cases, shares traded significantly lower than the net assets left over from the restructuring. Sometimes the corporate shells that were left with tax loss carryforwards had even more value if an effective cash flowing acquisition was made.

Back then, the theme generally focused on finance-related companies. Over the last few years, something similar has been happening with a handful of biotech and biopharma companies. A representative example is a pre-revenue biotech that believes it has a promising drug in its pipeline. They may have had positive results from clinical trials. The company is able to raise money off that success, but then the drug fails in a phase 3 trial. The company generally has excess cash after that failure, but the share price sometimes drops significantly below the net cash price.

I have historically done well with the theme that mispricings (think opportunities) can occur when there is changeover involving different types of investors. In the biotech example above, the shareholder base of that company are investors who are specifically interested in new drug development. Those shareholders don’t care about the post-failure balance sheet or tax loss carryforwards. They certainly don’t care about owning a failed company where the potential future returns are measured in two digits and not three or four.

Those types of shareholders indiscriminately sell on the news that the clinical trial failed.

For the company, the economically rational thing to do in that situation is to immediately cut the work force and as many expenses as possible, attempt to get out of all long term commitments such as leases, survey their intellectual property to determine if any of it has value, and then return the cash on their balance sheet to shareholders. After that, if there is interest from outside parties involving the corporate shell and their tax assets, then the company should hand the reins over to them.

Oftentimes, the company needs to be pushed to do the economically rational thing. Fortunately, there are a few activists in this area. We currently are passive owners of a basket of these situations. I am a buyer, so will keep the names that I am interested in private at this point. I am also interested in taking a more active role for the right opportunity. If this is an area of interest for you, please let me know.

ENDI Corp. (ENDI)

ENDI shares declined from $16.75 at the end of 2025 to $15.00 at the end of the first quarter.

In March, the company reported strong results for full year 2025. Assets Under Management increased by 21% to $4.1 billion at the end of 2025 compared to the end of 2024. Overall revenue increased by 38% to $21.3 million. Adjusted EBITDA increased to $11.1 million from $6.5 million compared to the year before. ENDI ended 2025 with $53 million of total cash and investments compared to $20.1 million at the end of 2024.

The company will report Q1 2025 results in May.

Finch Therapeutics (FNCH)

Finch shares declined from $13.49 at the end of 2025 to $9.64 at the end of the first quarter. They are lower today. Don’t let this declining price fool you. As I will explain below, no actual value within the company has declined.

Consistent with the liquidating biotech and biopharma theme, Finch is one of the rare companies that is doing the economically rational thing. As I have mentioned in previous letters, they won a jury trial in August 2024 against Ferring Pharmaceuticals, with the jury finding that Ferring infringed on three of Finch’s patents. The value of that award to Finch is between $25 and $80 per share depending on the post-trial decision from the judge. The judge must determine an ongoing royalty rate and determine whether enhanced damages will be awarded. We have now waited more than 20 months for the judge’s decision.

No matter the outcome, an appeal is highly likely and will cost money. Finch also had a lease that they needed to get out of. Due to these two items, even when the judge provides a decision, the market will give a substantial discount to its shares compared to the overall award.

Because of this, the company decided to move forward with a strategic Chapter 11 filing in order to eliminate the lease obligation and organize an outright sale of the entire company. This sale involves the litigation claim above, 160 issued patents that Finch owns or exclusively licenses, an additional potential case of infringement involving a global corporation, and the corporate shell, which has significant net operating loss carryforwards.

The company has disclosed that there has been healthy interest from potential buyers. We should have a resolution in early June.

I believe that this process will maximize the value of Finch for shareholders and will monetize the assets more effectively than if Finch remained a publicly traded company. While the ultimate sale price won’t be known until June, I continue to believe that we will get a healthy premium over our purchase price.

Liquidia Corporation (LQDA)

Liquidia shares increased from $34.49 at the end of 2025 to $37.74 at the end of the first quarter.

I have written extensively about our investment in Liquidia. The launch of their Yutrepia product has been nothing short of outstanding. We will be receiving a company update in the next few weeks and expectations continue to be high.

The current short term market moving event is the judicial decision in Liquidia’s patent infringement case with United Therapeutics (UTHR) involving PH-ILD. We should receive the decision at any moment.

The math checks out as follows:

If Liquidia wins outright with no infringement found, Liquidia should be able to produce $1.2 billion in revenue in 2027 with net margins of at least 60%. If we apply the current market multiple of their competitor, United Therapeutics, then Liquidia shares are worth at least $140 per share fully diluted.

If Liquidia is found to have infringed on the United Therapeutics patent, the likely outcome is for the court to impose a royalty on Yutrepia sales involving PH-ILD with a royalty range between 3% and 10%. Assuming PH-ILD-related Yutrepia sales are 70% of overall 2027 sales of $1.2 billion, and assuming the worst-case scenario of a 10% royalty, Liquidia shares are worth approximately $123 per share fully diluted.

In the worst-case scenario, the judge could find that Liquidia infringed on the United Therapeutics patent and issue a permanent injunction on the sale of Yutrepia to PH-ILD patients. I believe this potential outcome has less than a 5% chance of happening. However, if it does happen and there are no sales to PH-ILD patients in 2027, Liquidia shares would still be worth $70 per share in 2027 on sales to PAH patients alone.

To be clear, if the patent infringement decision goes against Liquidia, I would expect shares to decline in the short term, perhaps sharply. But, if you follow the math I have laid out above, Liquidia is extremely cheap today under any outcome.

Additionally, I believe the company can continue to significantly grow revenue with stable margins in 2028 and beyond. $1.2 billion in 2027 is just the beginning. Treprostinil formulations like Liquidia’s Yutrepia currently generate $2.9 billion of annual industry revenue. Liquidia has already shown that they can not only take the majority of the treprostinil market, but they can also expand the total addressable market by treating patients who are both naïve (i.e., not currently being effectively treated), and by more effectively addressing patients who are currently being treated by non-treprostinil treatments.

I have never been this bullish on a position we have held in the fund. Again, there certainly could be short term volatility in the stock, but if you look at the numbers above, Liquidia is well positioned to trade at a stock price much higher than today in 2027 and beyond even if there is an extreme negative outcome in the patent infringement case.

Thank you again for your investment and commitment. Arquitos is open to new investments and additional contributions from current investors on a monthly basis. I appreciate your introductions. I look forward to continuing to compound assets on your behalf for many years to come.

Best regards,

Steven Kiel

References

1. Founded April 10, 2012

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.