What a ride Botanix Pharmaceuticals Limited (ASX:BOT) has had this month.

Disclaimer: I own shares in Botanix Pharmaceuticals Ltd.

What a valuable lesson Botanix Pharmaceuticals Limited provided to the market and many investors this month! Botanix sell and promotes an FDA-approved product called Sofdra, which treats excessive underarm sweat. Shareholders needed a lot of it that day of the crash 💦

The stock soared to an all-time high of 50 cents earlier in the year, only to plummet by 58% in a single day due to vastly lower-than-expected numbers from their new product launch, Sofdra. The market was clearly underwhelmed, and the swift response was evident.

Was this an overreaction, or was it justified given the released update?

As a long-term holder and believer in both the product and the company’s future prospects, I believe the figures were somewhat unclear. Investor sentiment had reached dizzying heights; euphoria took over as launch numbers were extrapolated to extreme predictions, with some projecting a $10-$20 share price and a $10 billion market cap based on the new product launch.

While management painted the product’s progress as “strong,” sound investments cannot be based solely on their narrative. They certainly contributed to hyped expectations…

The optimism was so high that anything less than extraordinary results would undoubtedly lead to consequences for the stock, and that’s exactly what transpired. The warning signs were there for all to see; those following along and engaging in various forums, social media discussions, and investment circles were all buzzing about the product launch.

📈 There was immense pressure for the update to meet expectations.

The market update did not come close to investor expectations, and a sell-off followed. The situation worsened when management, the next day, released an updated patient uptake report confirming that patient enrollment was tracking as initially planned and the numbers the day before were incorrect. Yes, you read that correctly…A NON non-price sensitive announcement was released AFTER the sell off, claiming new updated numbers.

Unfortunately, their announcement from the day before had shown lower patient numbers. The damage was already done. Now, investors may find it hard to trust management after this misstep, and rightfully so. This situation highlights one of the cardinal rules of investing: trust in management. When that trust is broken, it often causes significant reevaluation of one’s investment thesis.

📖 Read more about my Management Criteria.

Did the Thesis for Botanix Pharmaceuticals break for me?

Typically, this would raise a significant red flag, and I’ve sold stocks over much lesser management mistakes. However, on the day of the crash, I decided to average down on the stock, successfully halving my average price. While I’m currently sitting on a slight loss, I still believe that Sofdra has long-term growth potential. I expect the full year’s results will lead to a reevaluation of the share price.

When I project my initial numbers, I tend to be conservative, which means my estimates for patient uptake, refills, and sales were not overly optimistic from the outset. If the figures had been accurately communicated on the first day, I doubt we would have faced such a steep sell-off.

The management highlighted a few metrics to showcase success while downplaying the true figures of the business. One key metric was GROSS SALES, which were reported at $25 million AUD for the first half. However, with the Gross to Net Yield (GTN) expected to be around 23%, the real net revenue turns out to be closer to $6 million—a considerable drop from expectations.

Although I’m still a holder and have faith in the product and the sales team, I’m keeping a close eye on management for any further warning signs. Nevertheless, I remain optimistic that a rerating will occur as sales improve, patient uptake increases, and the full sales team successfully mobilises to penetrate all the regions they’ve targeted.

📅 Just needed to extend the time horizon…

Instead of quarrelling over numbers and extrapolating various scenarios, I still view Botanix Pharmaceuticals as a minimum $1 billion market cap opportunity, with the potential to achieve $100 million in net revenue. Applying a conservative EV/Revenue multiple of 10 gives us a solid foundation to see how the numbers align.

I don’t want to get too caught up in the numbers here, this is not a valuation or deep dive, rather a reflection on what went wrong and to caution investors about the reality of a 60% share price tank on over-promised and hyped stories.

Investors need to understand the metrics to measure…

This brings up another critical question regarding how we measure the performance of the company in which we’re investing. How can we define success? Which metrics are best suited to hold management accountable for their estimates and guidance?

➡️This is clearly defined in our Investment Thesis notes.

I believe this is an area where management has faltered, as they haven’t provided clear metrics that investors can use. We’re left waiting for quarterly financial reports to gain a clear understanding of the business’s income and its associated costs. Instead of using vague terms like GROSS REVENUE and comparing it to other “successful” dermatological product launches, they seem to obscure the truth, if only slightly.

What we really need to know is straightforward:

– How many patients adopted the product?

– How many refills did we receive?

– What was the net revenue we can legitimately bill for? Not just the revenue from products sold, much of which is cash we’ll likely never see.

Finally, we need to understand what it costs to achieve these results—product costs, sales team expenses, and so on.

The update was poorly received—not just because of the numbers, but also due to the convoluted presentation, which made it difficult to get to the essence of the matter. The figures were significantly off, and investors noticed that right away.

The bigger question is whether Botanix Pharmaceuticals can deliver?

We were all drawn in by overly optimistic management, driven by ridiculously outlandish analyst reports and a wave of retail speculation that inflated the initial launch numbers to extremes. Any results that fell short of these heightened expectations were bound to be looked down upon. I’ve discussed this with many other investors.

Even if the results show positive growth, if they come in below what the market was hoping for, the share price is likely to take a hit.

Many investors jumped in as the price rose from 30 cents to an all-time high of 50 cents, with several participating in the capital raise in the 30-cent range. However, it wasn’t long before we saw a dip to 13 cents. This is the reality of investing in small-cap stocks, especially those involved in higher-risk areas like newly launched products and startups, not to mention the sector-specific risks that come with them.

I’m disappointed by the movement in the share price, the management’s blunders in the update, the “rehashed” figures, and the overall investor sentiment that led to a huge oversold day. It is what it is. I did choose to top up along the way and still expect solid growth over the next 12 to 24 months, aiming for at least a $1 share price—not based on mere euphoria or wishful thinking, but grounded in data and numbers.

Always ➡️ DYOR rule #1 of investing…

If management can deliver and the full sales team steps up, we should see quarter-on-quarter sales growth. Currently, we need to measure patient uptake per month, ensure refill rates remain high to create revenue stickiness, and significantly increase overall prescriptions, while also improving the yield on gross sales from the current low of 20% to align with industry standards.

I also believe in Sofdra as a leading dermatological product; once patients start using it for their long-term sweating issues, it’s likely they’ll continue using the product. To achieve a goal of $100 million in gross revenue, we’d need to sell around 60,000 to 70,000 prescriptions annually. With a gross to net ratio of 25%, that would give us $25 million in net revenue.

To reach $100 million in net revenue, our gross sales would need to hit $300 million with a 30% gross-to-net, meaning we’d have to sell about 200,000 prescriptions annually. While that’s a significant leap from current levels, it’s achievable over a 3 to 5-year timeline.

The potential is certainly there.

However, cash burn (operational expenses) is projected to remain high at around $40 million USD a year, so we have some distance to cover before our costs align with operational needs. There’s also the risk of more capital raises that could lead to dilution, or the possibility of a takeover, especially with the current share prices being low.

When it comes to labeling these early-stage companies as overvalued or undervalued, it’s a challenging proposition. For me, though, it represents a significant position within my top five holdings.

Why such a risk with Botanix Pharmaceuticals?

I participated after FDA approvals, which significantly reduces the risk for the company. I liked the product; as someone who tends to sweat, I understand its value and would love to use it.

The market penetration potential in the U.S., coupled with a large total addressable market (TAM), provides a solid runway for growth. While the management has a proven track record of successfully rolling out product launches, I have slightly less confidence in them now. They need to demonstrate to the market that they can still deliver successful launches. They need to now earn their rather large compensation.

The entry point is low, especially after the recent crash. We are now a $250 million AUD market cap company. Anyone buying in at these lower levels and being patient for a few years could potentially be rewarded. This is not financial advice; do your own research and understand the metrics. I see asymmetry here, especially since the stock has halved in value.

Additionally, the company could become a potential takeover target, especially with an FDA-approved drug in the U.S. market, which would carry a premium over the current trading price. The stickiness of the product and the recurring revenue potential could create a competitive advantage.

🌹 It is not all rosy…

I have concerns about the product platform, which I believe did not perform very well during the launch and may have been overhyped. This has resulted in a more traditional boots-on-the-ground sales approach. That said, in the long term, with more than one product to offer, this could serve as an inflection point if executed well and if market uptake improves.

I could delve into numerous charts, numbers, and spreadsheets to analyze data, such as refill rates of around 75%. These figures would yield significantly different results based on varying inputs. However this piece is more about “What can go wrong” on ideas and in hyped up ideas.

What’s more important, is understanding what type of investor you are before assessing whether the company’s fundamentals or technicals are worth investing in. Many investors got caught expecting quick, positive updates that would serve as short-term catalysts for trading. Instead, they experienced a 60% drop in share price—a painful lesson learned.

For those who couldn’t average down, they now need to see share price gains of 100-200%, depending on their entry points.

📉 A lesson in small-cap stocks…

Drops and sell-offs are just part of the game for me. Ask any micro or small-cap investor how many dips they’ve navigated on their journey to finding baggers, and you’d be surprised by the challenges they’ve faced along the way. Nothing grows in a straight line; I’ve weathered many pullbacks 50%+ only to see companies deliver two or three baggers within six months.

If the fundamentals and long-term thesis surrounding a company change drastically, it might be time to consider selling. Aside from some management missteps and underwhelming revenue, the numbers are still trending upward. I’m patient, I can handle pullbacks, and I’m glad I averaged down.

Many long-term investors have become bitter and angry, and understandably so. It can be disappointing, but that’s not the end of the story. I hold a few stocks that are all significantly up, though at one point, one was down 50%, another 40%, and a third 35%. I recently sold a losing position, only for it to bounce back quickly.

You make your money by patiently waiting, as long as the thesis stays intact.

There will be plenty of disappointments along the way—quarterly announcements that don’t meet expectations, capital raises, and management hiccups. These are common in this end of the market. Take Botanix, for example; it dropped 50% on news of an FDA approval delay—not a rejection. Shortly after, it surged 150% on approval.

Understanding your risk appetite, knowing what you’re investing in, and being aware of your time horizon are critical at all times. If you can’t handle those sharp drops, then small caps might not be for you.

It’s not easy; I don’t just wake up to a drop and think, “Great, it’ll bounce back.” It can be a stressful day filled with reviewing the thesis, closely examining the numbers, discussing with trusted investors in my circle, connecting with shareholders, and reassessing my thesis points—determining if it’s time to sell or average down and buy more at lower prices.

These are tough, emotional decisions made under pressure, not in hindsight.

When things seem off, it’s hard for investors and shareholders to believe what’s happening, especially when a board releases incorrect numbers—that’s why it’s essential to do your own research. The issue was identified well before the board made the announcement the next day.

For those who acted quickly and caught the 13-cent low, they were rewarded fairly swiftly with a return to the 17-cent mark the next day. These are the decisions you need to make: review your notes and make calculated choices under pressure. It’s no easy feat.

Only time will tell if this will pay off. I have confidence in the numbers; I might be a bit early, but I don’t think I’m misguided about the long-term product rollout, so I’m waiting patiently. Other opportunities may come along; they need to be weighed against my current investments, but I’m invested in Botanix and expect it to become a bagger over a multi-year period.

🧠 What a great lesson to learn and the reality of a sell-off.

Botanix Pharmaceuticals presented a valuable lesson in the world of story stocks. It was driven by retail hype, an overly optimistic board of directors, and a flurry of analyst coverage ramping up launch expectations. All of this created a scenario for either a significant spike in the share price or a major overreaction, which we unfortunately witnessed. Investing based on a single make-or-break update is not a solid strategy.

It’s crucial to remain vigilant, understand what you own and why, know the expectations, identify the catalysts, and analyze the numbers. Always trust but verify—whether it’s management, other shareholders, analysts, or anything else you encounter.

Speculation ran rampant with Botanix, and many jumped on the hype train, ultimately losing a considerable amount of money in the process. These hard-learned lessons stick with you.

For me, I’m still holding onto my shares—disappointed but not defeated—and I’m looking forward to the next quarterly update along with the financials to make sense of everything. I’ll also work on some more conservative numbers for my price targets. As of now, the share price is 15 cents. We can revisit this in a couple of years to see if I was mistaken or made the right call.