Almost two years have passed since I first wrote about the promise of Soliton for tattoo removal. Since then, the company expanded its indications to include cellulite removal. Soliton (SOLY) is currently rallying apparently in anticipation of news from the FDA on the cellulite application. Next, the coronavirus pandemic delayed plans for a 2020 launch. While I expected a full launch this year, Soliton actually has more modest plans. During the conference call of its November earnings report, Soliton explained that the company will introduce devices to 25 pre-selected clinics with well-regarded physicians. These physicians will establish standards of procedure and conduct additional learning like understanding how care can improve with multiple treatments. As a result, a full nationwide launch will not happen until 2022.
Perhaps this extended timeline created the disappointment that drove a 17.9% post-earnings loss. SOLY has recovered in fits and starts since then, culminating in the current rally presumably in anticipation of news from the FDA. In November, Soliton indicated that it expected a decision sometime (early?) in the first quarter of this year.
Waiting on News from the Food Drug Administration (FDA)
Soliton (SOLY) recovered its entire post-earnings loss in just two weeks. The stock even achieved a brief breakout above resistance at its 200-day moving average (DMA). Fresh momentum this year has produced a 32.9% year-to-date gain ahead of imminent news from the FDA on its final review of Soliton’s 510(k) application for cellulite reduction using a second generation Rapid Acoustic Pulse (RAP) device. During the November earnings conference call, Soliton management delivered a very positive assessment of the prospects of this review. From the Seeking Alpha transcript of the earnings conference call:
“…in the normal course of 510(k) process, if you’ve gotten this far and haven’t been pushed back on in terms of the 510(k) status versus de novo, then the probability is go up dramatically, that you probably stay a 510(k). We can’t guarantee that of course. But we do acknowledge that we’ve sort of made it beyond the time point when most conversions to de novo would have already happened. And so we’re pleased by that. But we’re mindful that FDA always has the latitude to change their mind at the last minute.”
Additionally…
“…if something had been sort of a knockout punch or a big problem, in the normal course, that would have given rise to the potential for specific disclosure. And since we haven’t had that disclosure, I think anybody can conclude that we consider ourselves in the normal course of a 510(k) submission. And I’m comfortable with that representation.”
I appreciate the current rally. However, it has all the markings of a growing speculative fever. The fever tends to end with the release of the news, whether good or bad. The coming news has little potential for an upside surprise, so even the release of good news will likely generate a “sell the news response” after a strong run-up.
Moreover, Soliton’s prospects now remain exactly the same as they were back in November. The company has not released materially new news since November earnings. In other words, the current price action is likely about placing short-term bets on a near-term catalyst.
The Trade
The timeline for a nationwide launch in 2022 pushes out a full understanding of the economics of Soliton deep into 2021. I highly doubt traders and investors can maintain momentum during this on-going uncertainty. SOLY’s longest upswing occurred in its first two months as a publicly traded company. SOLY also enjoyed two months of stability before flaming out in a one-week burst a year ago. In other words, SOLY should remain quite volatile. I prefer to trade around volatility even if this approach means missing out on the cream of the froth.
Having said all that, I am inclined this time around to see how much mileage SOLY gets out of anticipating the FDA news. I accumulated my latest position in the fallout from the secondary offering. That calamity looks like a bottoming moment. My absolute limit is a parabolic move near important resistance or at all-time highs. (price action that accelerates for at least two days well above the upper Bollinger Band (BB)). Parabolic moves are rarely sustainable.
SOLY’s last two days of trading qualify as parabolic. However, the stock is nowhere near critical resistance like the close of the big gap down or the last (parabolic) peak that preceded the gap down.
Be careful out there!
Full disclosure: long SOLY