Hello,
Today I’ll be covering one of the most interesting special situations I’ve seen this year. At first glance, it’s not the type of company I’d usually write about. And if not for
—a good friend and an investor I rate highly—I would have skipped it entirely. It’s in an industry I’ve never invested in, and on paper the numbers look terrible: negative net income every year since 2017. The exact opposite of the financially sound businesses I typically focus on.Look deeper, though, and the red ink isn’t from a broken business. The core operation is actually outstanding: revenue grew at a 13.3% CAGR over the last decade, with steady-state EBIT margins north of 20%. That growth came organically, by steadily taking share from much larger competitors—even while charging about twice as much for its products. And it managed this in the middle of a brutal cycle, with the current year shaping up as the worst for its end market since 1951.
So what’s driving the ugly numbers? Years of heavy spending to secure an FDA license. That outlay has masked the company’s true earning power. But the process is now at the final step, with a decision expected by the end of October. If approval comes, the company opens up a much larger market where it would hold a monopolistic treatment and generate enough revenue to cover development costs—and plenty more on top. If not, development spending is already being cut back, and reported results will improve this year.
Either way, the core economics will finally shine through—and other investors will see just how high-quality this company is, and how cheaply the market is offering it right now.
As you’ll see, this setup leaves several possible outcomes depending on the regulators, the manufacturing partner and the management. And while I can’t pin down a precise IRR today, the scenarios where I lose money look few and unlikely, while the paths to good—or even great—returns are many and more probable. In my view, this one is a classic case of low risk but high uncertainty.
To get comfortable I’m seeing clearly through the fog, I spoke with the long-time CEO and the new CFO—a seasoned exec who left a ~$50B giant earlier this year and joined this ~$50M micro-cap. Those conversations only reinforced my sense that the company is at a pivotal moment, and I’ll weave in their insights throughout this write-up. For now, I’ve taken a small tracker position, with the intention to size up if the risk-reward tilts further in my favor as catalysts unfold.
If this sounds complex, it only gets more so as you read on—not because the thesis itself is complicated (it’s actually rather simple), but because it’s a hard-to-unwrap situation.
So I can’t promise you’ll find it exciting, or that you’ll walk away wanting to invest — and I understand anyone who stops here. What I can promise is that if you keep reading, you’ll be among the best-informed investors on this opportunity. And as new information comes to light, you’ll know what matters, what doesn’t, and how each development shifts the risk-reward. That will let you act while others are still parsing headlines and playing catch-up.
Sorry for the long intro. Let’s dig in.