SSI WEEKLY NEWSLETTER
This weekly newsletter intends to share the most interesting event-driven situations I’ve looked at over the week as well as other updates and highlights from SSI.
Here is what you will find in this week’s newsletter.
- Portfolio Idea Updates: OCI:AS, BOOM, LQDA, TBNK, MSTR
- Quick Idea Update: FNCH
Disclaimer: All content on Special Situation Investments site and in the newsletter is not and should not in any circumstances be considered as investment advice or trading recommendation. All information presented is strictly for illustrative and educational purposes only. Please carry out your own research and due diligence.
PORTFOLIO IDEA UPDATES
OCI N.V. (OCI:AS) – 3rd asset sale will close next week
OCI announced that all regulatory approvals for the divestment of Fertiglobe have been secured. The transaction is set to close on October 15. This will mark the third successful large asset sale out of the four recently announced. The methanol business sale is still pending and anticipated to close in H1 2025. So far, the thesis is unfolding as expected. Once the Fertiglobe sale closes, OCI should promptly announce a €14.5/share dividend (54% of the market cap). Hopefully, management will also finally take the opportunity to outline further capital allocation and strategic plans. The company remains significantly undervalued, trading at $8.5bn EV compared to $8.6bn in net cash to be received from the four major asset sales. I believe the dividend payout and clear communication on future strategy will trigger a stock re-rating. Full OCI write-up.
DMC Global (BOOM) – strategic review is nearing completion
This week, the president of Arcadia, BOOM’s main business segment, abruptly resigned with immediate effect. The press release included some unusual language, mentioning details not typically disclosed in these situations. For instance, BOOM stated it expects to “finalize a separation agreement” with the president, “contingent on his signing and not revoking a release of claims against the company and its subsidiaries.” It’s unclear what to make of the sudden resignation and this specific wording. However, considering the ongoing strategic review and continued pressure from Steel Connect, those developments could signal that the review is getting close to completion. BOOM remains undervalued, trading at a steep discount to its sum-of-the-parts value ($20+/share). Full BOOM write-up.
Territorial Bancorp (TBNK) – Landon hasn’t addressed the main concerns yet
Landon and HOPE/TBNK exchanged shots again this week, though nothing really new came up. Landon has simply reiterated the same offer, with the only new details being that his group now has 6 investors and that they’ve expressed openness to a lower tender threshold than the previously mentioned 70%. However, key concerns, such as financing, the anonymity of financiers, and the lack of operational efficiency plan have remained unaddressed. TBNK’s response was much more agressive and punchy, but similarly just reshuffled the same information. TBNK is currently trading at a 3% premium to HOPE’s offer and with an 18% spread to Landon’s bid. Shareholder meeting date is set for November 6. Full TBNK write-up.
Liquidia (LQDA) – litigations around one of the patents finally shut down for good
The Supreme Court rejected UTHR’s appeal on the previous ruling that LQDA did not infringe the ‘793 patent. The patent covers the method of administering UTHR’s Tyvaso via inhalation for treating PAH. With this decision, the ‘793 patent is now completely out of the picture and, as LQDA’s CEO stated, will be “forever unenforceable.” Following the news, LQDA’s share price surged by 10%. The remaining litigations involve the ‘327 patent, which pertains to the treatment of PH-ILD. Full LQDA write-up.
Microstrategy (MSTR) – premium to NAV continues to increase
MSTR’s share price jumped 16% on Friday. It seems that the move was prompted by a spike in BTC price (+6%) and CEO Michael Saylor’s interview on that day, where he talked about turning MSTR into a Bitcoin bank, claimed Bitcoin could eventually be worth millions per coin, and speculated that MSTR could hit a trillion-dollar valuation. All of that is just Saylor’s usual pumpy gibberish, which simply seems to have become more agressive recently. Yet, I’m still surprised how much impact these comments seem to have on the already massively inflated MSTR valuation and already huge market cap. The premium to NAV has now surged to 240%, matching its all-time high from early 2021.
The situation clearly isn’t moving in the expected direction so far. And that’s not because of BTC volatility – BTC price is still in line with the levels at the time of the write-up, while MSTR’s share price is now up by 50%+. There are probably a number of factors that are causing the gap to widen, e.g. crypto traders continue to pile into MSTR, Sailor is fanning the flames even more aggressively, the launch of leveraged MSTR ETFs, etc.
In my eyes, none of this changes the underlying thesis, and I still believe the current premium to NAV will narrow down closer to zero. The questions is when – and here I am fully aware of the ‘markets can stay irrational for longer…’ paradigm.
It’s becoming more apparent that this position will demand more patience and guts to ride out. If the recent trend continues, it’s not impossible for MSTR premium to widen even further, and there’s no telling where the ceiling might be. But as will all bubbles in financial history, once it pops, the downward spiral usually happens relatively quickly. In this case, it could deflate even faster due to leveraged ETFs, etc. Unfortunately, instead of the initially contemplated mean reversion /arbitrage bet, we now have something more akin to a bet on bubble pop. Full MSTR write-up.
QUICK IDEA UPDATE
Finch Therapeutics Group (FNCH) – big update from JESQ
Quick reminder – FNCH is currently pursuing a patent infringement lawsuit against Ferring Pharmaceuticals. In August, FNCH was awarded $25.8m in damages. However, the jury found willful infringement on Ferring’s part, which could entitle FNCH to enhanced (potentially trebled) damages. Historically, 55% of cases involving willful infringement resulted in enhanced damages, with an average multiplier of 2.2x on the awarded amount. This means FNCH’s final award could significantly exceed $25.8m. The stock is trading at $18.5m market cap.
Guest pitch author JESQ has just shared a detailed update on the status of the litigation. I’m adding the full update below but you can also find it in this comment section.
JESQ’s Latest Insights on Litigation Progress
Having finally had a chance to review the initial post-trial briefing, I want to share some thoughts on where we are now. Since this is a sophisticated crowd, I’m not going to summarize the briefs, but rather share some things that caught my eye.
On the willfulness enhancement — reminder: FNCH is trying to triple the award — I thought FNCH wrote a very strong brief, particularly on (1) Ferring personnel access to and copying of UNM work and (2) the Borody witness saga, with Ferring’s shady-as-all-heck behavior. And though pieces of the story have been evident from prior docs and trial coverage, it’s helpful to see it all laid out. I think it presents a strong case for enhancement. A couple of eye-raisers I hadn’t seen written so clearly:
- After Rebiotix’s founder accessed the provisional patent application for FNCH’s ‘914 patent — while ostensibly serving as a ‘CEO in residence’ at UNM — she saved the data to a personal drive titled “newco ideas” (!!). I mean, JFC, hard to imagine something more blatant in terms of access and copying.
- Way before any litigation or even threatening letters had materialized, the Ferring buy-out agreement of Rebiotix required Rebiotix’s founders to personally indemnify Ferring for potential patent infringement of FNCH. Broad indemnification agreements are of course common in acquisitions, but to have a specific carve-out for a specific set of competitor patents — before anyone is even talking about suing! — strikes me as rather unusual and indicative of, shall we say, a guilty conscience.
- FNCH seems to have the goods on Ferring straight-up lying to the court at certain points in the Borody saga (discussed in the write-up), the kind of thing that might merit a bar referral. And all in service of, essentially, trying to pay off Borody to undermine the patents, then hide him, then spring him on FNCH at the last minute. It’s all a little crazy and would seem sufficient on its won for both enhancement and (eventually) attorney fees, as some other bloggers references above have noted.
To be sure, some of the other “enhancement factors” feels a little weaker (like adding and removing defenses late in lit), but note FNCH doesn’t have to hit all of the factors for a multiplier — even a single egregious one may be enough — and if FNCH can manage to check the boxes on all of them, that becomes a strong case for straight tripling, per their cited caselaw.
All in all, we’ll of course have to wait to see what Ferring comes back with in the oppo brief, but it reads to me like a strong opening salvo. More thoughts coming below.
On timing, briefing is due to be completed November 21. The FNCH judge, Jennifer Hall, actually has another IP case that went to trial a little ahead of FNCH, Sight Science v. Ivantis. There, verdict was in April, post-trial briefing completed end of August, and she just set a hearing for early December — although that case has s a little wrinkle that may have delayed things. If we assume a similar sort of schedule for us, we could see a FNCH hearing in the Feb-March timeframe.
What about settlement prospects? I actually think there’s a window here where we MIGHT see a settlement before the hearing, even as briefing is underway. And the reason is: the unique bad optics of the “willfulness” factors, as it’s finally laid out for Ferring by FNCH.
Basically, somewhere in the bowels of Ferring U.S. or European headquarters, there’s a general counsel or AGC trying to get his handle on this lit. He’s now a bit more skeptical of what his outside counsel at MoFo have been telling him, since they assured him all along that Ferring had a great chance at trial — before promptly getting their ass handed to them. Now this GC needs these same lawyers to evaluate the prospect of enhancement and attorney fees, but the lawyers are even more conflicted, since the very pre-trial and trial conduct that may lead to tripling implicates them specifically (and Rebiotix people of course). It’s a big principal-agent problem for the GC to get an accurate read on the situation.
But now FNCH lays it all out in one place, in one brief, with a shiny bow: all the bad acts by Rebiotix and MoFo. The Ferring GC can read it all for himself on the toilet.
So when MoFo assures this GC that they’ll beat back enhancement, does he quite believe them? Does he want to see the company dragged through the mud again, publicly, at a hearing that will center largely on these bad acts? Maybe a deal can be reached to avoid further unpleasantness? Maybe maybe. I’m not saying one will definitely happen — but there’s a possibility, given these dynamics.
Re: going-forward royalty damages: Although the jury came back with, essentially, a 5.5% royalty, FNCH cites caselaw to justify a 16.5% royalty, based on the willfulness finding and, basically, that FNCH is in a much-stronger position for a “hypothetical license” having proved infringement. That would be nice.
Also note that the brief (with a little math) discloses the current Rebyota revenue pace: $12M a year. Not a banger, but not nothing. Plus it’s still early in the deployment of the drug and, per the briefing, Ferring evidently has plans to expand the franchise/scope of Rebyota, which could get mighty interesting in the years ahead.
Ferring’s opening brief to throw out the verdict lays forward a number of technical patent arguments. One thing that struck me though is how many of them were previously raised and rejected in Ferring’s summary judgment and Daubert motions (all but one, as far as I can see). Now, when a judge denies a summary judgment motion, it’s generally because (in layman terms) there’s a conflict in the evidence that requires the jury to sort out, or there is no conflict but the movant is wrong on the law. Both of these put FNCH on solid ground now, because if the judge previously thought “this is for the jury” in resolving MSJ, it’s unlikely she would now conclude “actually the jury got it wrong.” And if she made conclusions of law, that’s very unlikely to change. (The substance of the MSJ rulings is unfortunately in a sealed transcript.)
Now, that doesn’t mean Ferring can’t win on the post-trial issues — it’s not a logical impossibility. JMOLs are of course occasionally (if sporadically) granted in patent cases. Maybe on some of these issues, FNCH suggested they had favorable evidence that never materialized at trial. Maybe trial testimony diverged from deposition testimony and expert reports (the basis for MSJ motions). There’s a host of reasons the Ferring motion may have a valid basis. Still, in the broader sense, the judge has seen almost all of these arguments and Ferring’s best evidence, and found it lacking. Which is nice.
Some final odds and ends
- Per the briefing, pre-judgment interest comes to $3.8M, which is tacked onto the $25.8M verdict. Post-judgment interest is running at $1.17M a year, though that’s before any potential enhancement.
- I assumed Ferring’s post-verdict “motion for reconsideration” on the MSJ order would be folded into their post-trial JMOL motion, but in reviewing the reco motion now, I see it’s a Section 101/Alice invalidity argument, which is an issue of law for the judge, which means it’s not in the Ferring JMOL motion (and properly shouldn’t be). The civil procedure nerd in me *thinks* that entry of judgment necessarily mooted this motion, but the parties keep briefing it, so I don’t know. In any event, Ferring raises an issue the judge (necessarily) considered and rejected in the MSJ, so it’s a long shot.
- Per the post-trial schedule, attorney fee briefing is actually reserved until after an APPELLATE DECISION, which could be 2+ years off. I hope the market doesn’t lose sight of this (but fear it will), because, especially if FNCH wins enhancement, it would have excellent line-of-sight on a potential $20M+ attorney fee award — basically it’s current market cap! The tests are not identical, but are substantially overlapping, so an enhancement win would be strong ground for the fee motion. Does this augur in favor of early settlement, since FNCH, like the Terminator, will just keep COMING AND COMING at Ferring, for years on end? Maybe. It would be nice to see some resolution.