Why Soliton Sold Off on Good News from the FDA

As highly anticipated, medical device maker Soliton (SOLY) announced the company received approval from the FDA for the cellulite indication of its Rapid Acoustic Pulse (“RAP”) technology. SOLY initially opened on February 1st with a 17.3% gain, but the stock ended the day with a 3.6% gain. Why did Soliton sell off after this good news?

With two straight days of strong gains, Soliton (SOLY) finally closed its June 25th gap down from a secondary stock offering.

A few bullet points help explain the volatility and why Soliton sold off despite good news from the FDA:

  • Buyer exhaustion: When financial markets greatly anticipate news, traders and investors tend to act ahead of the news. Market participants typically look ahead; they buy and sell because of a belief in a particular future. Accordingly, most of the people who believe in that future place their trades before the news. If the news is the payoff, then trade must come before the news. When everyone is in who wants in, buyer exhaustion follows.
  • Over-exuberance: When news is anticipated over a long period of time, as with Soliton, there is more opportunity for excitement to build. The longer the runway, the more the potential momentum going into the news. In other words, the momentum can take on a life of its own and take a stock well ahead of the market’s short-term willingness to pay for the value of the news.
  • Technicals: Without a specific value placed on the imminent news, price targets from important technical levels can act like a magnet for traders. Technical levels can increase in prominence in the absence of a specific release date for the news as in Soliton’s case. Traders took SOLY right to the top of an important gap down from last June when the company announced a large secondary stock offering. That $11.86 level acted as approximate resistance as anyone who got caught off-guard by the pricing of the offering could jump at the chance at getting close to even. After Soliton’s FDA news, that level turned into a pivot as SOLY first gapped higher over the threshold and then closed below it. In other words, the key technical level anchored the price action and set the short-term limits of the trade.

All three of these effects interact with each other. Together, they provide powerful catalysts for bringing a news-driven trade to a stopping point. When the a company releases news that exactly meets expectations, the company offers no fresh catalyst to keep up the trade in the short-term. Everyone who believed in the news already bought. The trend and momentum chasers hop off. The long-suffering investors waiting to get back to even seize the opportunity to cash out.

What now after good news from the FDA?

I decided to watch the trading action after the FDA news. I considered taking profits only if SOLY dropped back into single digits. Looking ahead, Soliton offers fresh catalysts for the patient in the form of a product launch and adoption cycle. This latest FDA approval is the next, and not the last, step for Soliton’s launch plan.

Soliton reminded the market about its next catalysts with an update to go along with the FDA announcement. Here are highlights from the company’s press release video by President and CEO Brad Hauser:

  • 50M U.S. women want to improve cellulite. They represent a $5B market by 2025. Soliton thinks it can can take 5% market share or about $200M in revenue.
  • The cellulite clinical trial met with high satisfaction and good tolerance. The average pain score was 2.4 on 0-10 scale.
  • Before and after photos provided examples of effectiveness on all skin types.
  • Two dermatologists gave clinical testimonials. Dr. Elizabeth Tanzi is a Scientific Advisory Board Member and a lead investigator on the cellulite study. Dr. Michael Kaminer is the Scientific Advisory Board Chairman and a member of the Board of Directors.
  • 63% of Americans(44M) with tattoos would like some kind of removal making a $4B global market by 2023. Soliton thinks it can take a5% market share or about $200M in revenue.
  • Tattoo removal (the first indication for the RAP technology) can happen in as few as 3 office visits. Soliton’s procedure out-performed laser treatment 100% of the time.
  • Commercialization
    • Shipping initial 25 devices in early Q2.
    • Upcoming improvements: auto-loading cartridges, enhanced user interface
    • Razor and blade model with consumable cartridges

The Trade

I had previously not seen estimates of market size. As a result, I took particular interest in this latest announcement. SOLY has a $250M market capitalization, the market values the company at just 1x sales in two years and half sales or less in four years. Accordingly, Soliton’s valuation looks reasonable for a speculative, high-risk bet on tattoo and cellulite removal in a low interest rate environment. SOLY could easily double by end of the year if the company’s initial launch plan shows promise and key achievements. Soliton could even become an acquisition target by late next year if the company avoids serious setbacks. I am buying dips from here.

Be careful out there!

Full disclosure: long SOLY

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