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Sorrento Therapeutics (SRNE) is a clinical-stage Biopharmecutical aggregation attempting to bootstrap its way into the $75 Billion Blight Immunotherapy market. There are a cardinal of aspects of Sorrento to be aflame about including growing Year-Over-Year (YoY) acquirement and a able-bodied artefact pipeline. Unfortunately, with seven abode of Generally Accepted Accounting Principals (GAAP) balance misses; multi-million dollar action matters; and bloodless accuracy in the anatomy of no balance calls for annual results, it is adamantine to acquaint if Sorrento’s woes are abiding or acute. I acclaim captivation accepted positions and do not acclaim initiating new abiding positions until Sorrento demonstrates adequacy about hitting its balance ambition and bringing added articles to market.
I am awful absorbed in Biopharmaceutical companies accepting started my career in Biopharmaceuticals. The science abaft creating life-saving anesthetic from the beastly body’s accustomed defenses fascinates me. This is not to acknowledgment the amazing banking upside potential, of advance in companies developing medical therapies for life-threatening diseases.
Cancer is one of these diseases. According to the American Blight Society, About 1 out of 3 bodies in the United States will accept blight during their lifetimes. Expanding this globally, in 2018, the World Health Organization estimates there were 18.1 actor new blight diagnoses and 9.6 actor blight deaths world-wide:
Source: International Agency for Analysis on Cancer
18.1 MM new all-around diagnoses construe into a ample abeyant bazaar for companies in the Blight abating business. Traditionally, blight analysis fell into one of three categories: Chemotherapy, Surgery, or Radiation. The success of these three analysis types hinged on a patient’s anatomy actuality stronger, during and column treatment, than the cancer’s adeptness to proliferate, spread, and army out advantageous cells. Mortality ante announce these approaches by themselves still leave abundant to be desired. Enter Immunotherapy Therapy.
Immunotherapy Analysis is the dispatch of the allowed arrangement to amusement cancer. The abstraction is to advise a patient’s anatomy to seek out and abort blight cells, abrogation advantageous beef untouched. Immunotherapy drugs accept enjoyed such success, that from the Food and Biologic Administration’s (FDA) approval of the aboriginal blight vaccine in 2010, to December of 2019, “cancer immunotherapy drugs accept captured about 50% of the all-embracing oncology drugs market” according to a analysis address by Business Wire. Additionally, the all-around blight immunotherapy bazaar generated about $75 Billion in 2019 and is projected to abound to $115 Billion by 2023.
I afresh abstruse of Sorrento Therapeutics and the assignment they are accomplishing in the acreage of blight immunotherapy, so I absitively to accord them a attending to see if I basic to add them to my portfolio.
Source: Broker Presentation
Sorrento Therapeutics, according to their website:
is a analytic stage, antibody-centric, biopharmaceutical aggregation developing new therapies to about-face cancerous cancers into acquiescent and possibly curable diseases.
In accession to its ambition of developing boilerplate Immuno-Oncology analysis products, Sorrento produces non-opioid affliction administration products. Some blight associated affliction is not calmly treatable with opioid-based affliction killers so this product-line makes faculty in two ways. First, a non-opioid affliction analysis can serve as the point of admission for Sorrento into oncology clinics. Secondly, non-opioid affliction analysis is an absorbing bazaar because the admeasurement of the accepted opioid crisis accumulation abundant political and media attention.
Sorrento Therapeutics was co-founded in January of 2006 by Henry Ji, Ph.D. In accession to co-founding Sorrento, Henry served in several director-level roles above-mentioned to acceptable Chief Executive Officer in 2012. Since 2006 Sorrento has undertaken assorted cardinal partnerships and acquisitions.
Source: Broker Presentation
In 2019, according to Sorrento’s best contempo 10-Q, Sorrento resegmented its business into two amount segments, “Sorrento Therapeutics” and “Scilex Holding.” In the absorption of level-setting, Sorrento’s Bazaar Capitalization is $793MM which puts it absolutely in “Small Cap” banal territory. Digging deeper, Sorrento generated about $18.3MM in absolute acquirement in the nine months catastrophe in September of 2019.
The Sorrento Therapeutics analysis generates best of the company’s $6.5MM in services-based acquirement from two subsidiaries Concortis Biosystems Corporation and Bioserv Corporation. The Concortis Biosystems Corporation’s branded “contract fill” operations ($4.6MM) and Bioserv Corporation’s branded “finish and fill” casework ($1.5MM) as of the nine months catastrophe September 2019 represents $6.1MM of absolute services-based revenue.
The Scilex Captivation division, as of September 2019, generated best of Sorrento Therapeutics’ $11.9MM absolute product-based revenue. Scilex generated $11.3 MM from a audible artefact – ZTlido 1.8%, a contemporary non-opioid based, lidocaine affliction abatement system. Interestingly, according to the 10-Q, all of the “ZTlido 1.8%” acquirement was generated from sales to a audible customer. This agency 94% of Sorrento Therapeutics’ products-based revenue, or 61% of the company’s absolute acquirement is currently generated from sales of a audible product, to a audible client. Since Sorrento still relies heavily on debt costs this acquirement absorption accident is not as apropos as it would be but it is a affair that will charge to be formed out as Sorrento matures.
I alluded beforehand that Sorrento has two basic “platforms,” “Immuno-Oncology Assets” and “Pain Administration Assets.” They are additionally exploring, “Translational Efficiencies” through a wholly endemic subsidiary, “Ark Beastly Health,” focused on alleviative beastly diseases leveraging Sorrento’s beastly therapies.
I jump into the science of Sorrento’s artefact platforms in this section. If you are not absorbed in the science, feel chargeless to skip to the “Investment Thesis” area below.
The base for Sorrento’s Immuno-Oncology belvedere is its proprietary “G-MAB technology” which contains “more than 10 quadrillion (10^16) audible antibiotic sequences” and is one of the best able-bodied antibiotic libraries in the biopharmaceutical industry according to their website.
Source: Broker Presentation
This belvedere is added burst bottomward into four sub platforms as follows:
Antibody-drug conjugates (ADCS)
ADCS are biopharmaceutical therapies advised to amusement cancer. Unlike chemotherapy, ADCS are advised to ambition and annihilate bump beef while sparing advantageous cells.
Source: Sorrento website
According to Sorrento’s website, “Sorrento’s abutting bearing ADCS technology belvedere utilizes avant-garde alliance methods to aftermath abiding ADCS by bond the adulteration to alone specific, preselected sites of an antibody; the consistent ADCS accept credible aerial anti-tumor adeptness in preclinical studies.”
Chimeric Antigen Receptor-T CAR-T, NK
CAR-T cells, according to The University of Texas’ MD Anderson Center, are a blazon of T-cell, genetically engineered to admit and annihilate blight cells. This analysis charge be tailored alone to anniversary patient.
CAR-NK beef are beastly allowed system, Accustomed Killer beef which can additionally be genetically engineered to seek out and annihilate cancer. The account of CAR-NK analysis over CAR-T is this analysis can be aggregate amid patients afterwards accident of Graft Against Host Disease (GVHD) or bounce by a patient’s body.
Source: Sorrento website
Sorrento is apprehension after-effects from its anti-CD38 CAR-T Phase 1 analytic balloon due in aboriginal Q1 2020. This analysis especially targets CD38 absolute beef and is actuality evaluated in assorted myeloma.
Intracellular targeting Antibodies (iTABs)
According to the National Institute of Health, “Intracellular antibodies are antibodies that are produced in the cell, and bind an antigen aural the aforementioned cell.”
Source: Sorrento website
Sorrento is exploring agency to advantage their (G-MAB) library accumulated with City of Achievement National Blight Center’s intracellular targeting technology to advance therapies which could be applicative to an arrangement of altitude including: auto-immune disorders, diabetes, afraid arrangement disorders, cardiovascular diseases, viral infections and cancer.
Oncolytic Virus (Seprehvir®, Seprehvec®)
Sorrento’s oncolytic virus assets are based on the beastly canker canker virus (HSV-1).
Seprehvir® – which has been activated in over 100 patients of all ages, destroys bump beef above several altered blight types including: glioblastoma, mesothelioma, melanoma, arch and abutting cancer, pediatric sarcomas and pediatric neuroblastomas. Not alone does it abort bump beef in absolute cancers, it additionally stimulates anti-tumor allowed responses post-administration.
Seprehvec® – is a approaching Immuno-delivery arrangement artefact Sorrento hopes to advance in its oncolytic belvedere acceptance targeting and arming of the HSV-1 virus to accomplish added “novel oncolytic immunotherapies.”
Source: Sorrento website
The best able candidates in the Immuno-Oncology belvedere artefact activity are advanced through the analytic balloon activity as follows:
Source: Sorrento website
Pain Administration Assets
ZTlido™ is a contemporary lidocaine application launched in October 2018 for abatement of Post-herpetic Neuralgia (PHN), a aching action acquired by accident to the afraid system. This action primarily occurs in cancer, HIV/AIDS patients, and those with Shingles infections. Ztlido offers an agnate akin of lidocaine to Liboderm and Versatis® produced by Teikoku Pharma USA and can potentially action a claiming to their ascendancy in the market.
RTX is a affliction analysis for hard-to-treat blight pain, currently in the adorning stage. The artefact is acquired from Resinferatoxin, a actinic begin in a Moroccan brier and aims to supplant or supplement the accepted opioid-based analysis approach. According to Sorrento’s website they completed a absolute Phase IB affidavit of abstraction with the National Institutes of Health.
The Affliction Administration belvedere activity additionally contains a cardinal of able candidates advanced through the authoritative approval process:
Source: Sorrento Therapeutics Website
If these therapies are ultimately accustomed for analytic use, they would supplement Sorrento’s products-based acquirement and allay some of the acquirement absorption accident I mentioned beforehand (depending on Sorrento’s adeptness to abduction bazaar share).
Now that we accept Sorrento’s accumulated anatomy and artefact platforms we can dig into the banking picture. Let’s attending at Sorento’s 1-year achievement in allegory to commensurable companies like CymaBay (CBAY), Abbott Laboratories (ABT), and La Jolla Biologic Aggregation (LJPC).
Sorrento leads the backpack from a absolute allotment angle over the aftermost year. This shows promise, at atomic in the abbreviate appellation added advertence the about-face may be working. Now let’s zoom out a bit and booty a 5 year view.
Despite the blink of achievement presented by the concise view, over 5 years the account is dimmer, Sorrento is the added affliction of our comparables accumulation and has not justified the accident of owning their shares from a allotment amount perspective.
Sorrento’s GAAP Balance per Allotment EPS accept not commonly told a abundant adventure either. Sorento generated greater EPS accident than analysts accepted for the aftermost seven quarters. Aboriginal date Biopharmaceutical companies are accepted to accomplish EPS losses but 7 abode of misses insinuates administration either lacks the adeptness to anticipation such losses appropriately or does not accommodate cellophane allegorical guidance.
Source: Y-Charts (Data-only)
It is no abruptness Sorento is authoritative ample expenditures in Analysis and Development (R&D) to advance their artefact pipeline.
The absolute advance in R&D is the better allotment of Sorrento’s Accident from Operations at $27.6MM. This makes faculty as clinical-stage biologic companies creating new drugs charge expend basic to advance their products. Additionally, Selling, General and Administrative (SG&A) accounted for the added better block of Sorrento’s Accident from Operations at $25.2MM with best of the $5.1MM YOY admission attributed to the sales activities associated with ZTlido.
I am a abiding amount investor, so I do not usually analysis the Simple Moving Averages to barometer affairs opportunity, but I am including it actuality for the account of concise investors absorbed in appraisal momentum. The concise boilerplate pushed over the abiding boilerplate in January apery an upside drive about-face which could be absorbing if timing the stock.
The acumen abaft this antagonism is most-likely two-fold: First, a contempo Sorento columnist absolution announcement its Chinese accomplice Mabpharm (HK:2181) filed a New Biologic Application for the Infliximab biosimilar antibiotic in China and Secondly, the contempo non-binding buyout action beatific shares aerial to the seven dollar ambit momentarily.
I accept looked at Absolute Returns, EPS, and Moving Averages, now I’d like to appraise Sorrento’s allotment amount in allegory to the LONCAR Blight Immunotherapy ETF (CNCR). “The Blight Immunotherapy ETF offers acknowledgment to a bassinet of companies that advance therapies to amusement blight by harnessing the body’s own allowed system” according to LONCAR’s website. The catechism I appetite to acknowledgment is: can I get reasonable upside acknowledgment to the Immunotherapy area afterwards demography the accident associated with advance in Sorrento by itself?
Source: Google Finance
Sorrento is absolutely added airy but those advance in Sorrento against CNCR accept been adored to the tune of 79% for their agitation over the aftermost year. Lastly, as added of a baseline metric I compared Sorrento to Vanguard’s S&P 500 ETF (VOO). The amount advance exceptional is beneath arresting at 67% but still meaningful.
Source: Google Finance
It is account advertence abundant of this arresting aberration comes as a aftereffect of their 3rd division 2019 after-effects and added afresh the non-binding buyout offer. At aboriginal glance these allotment are appetizing and over the aftermost year Sorrento has credible a few absolute break they may be able to sustain an upswing. Again, I am attractive for abiding amount plays so a approved history of EPS misses prevents me from acting on Sorrento. I apprehend the allotment amount to adapt bottomward to the $3.00 – $3.50 ambit already it becomes credible Sorrento is not accepting the buyout offer. Additionally, I begin a cardinal of apropos as I was researching Sorrento.
Four basic concerns, in accession to abiding EPS misses, jumped out at me apropos Sorrento during my research. First, Sorrento appears to do the bald minimum from a accuracy standpoint. Second, Sorrento currently has acknowledged issues apropos its NANTibody affiliation with NANTWorks, LLC. Third, Sorrento is allotment its amplification with a abundant debt load. And fourth, there are apropos apropos the authority of the contempo buyout offer.
Sorrento has a accuracy problem, they do not accept annual broker calls like added about traded companies authoritative it adamantine to accretion added accuracy on their banking filings above what is on the page. Instituting annual calls would accomplish it easier for investors to accost advice from administration about business action and operations. This would ultimately advance broker relations.
Sorrento is still in the bosom of the NANTibody acknowledged amount which acutely casts agnosticism on their adeptness to actualize amount by entering into, and active cardinal partnerships.
In 2013 Sorrento acquired a Chemotherapy admixture CynviloqTM by accepting IgDraSol, a clandestine aggregation in a $29.1MM banknote and banal deal. In 2015 Sorrento awash all its disinterestedness pale in IgDraSol to NantPharma, a NantWorks, LLC subsidiary, for $90.1MM. In band with the sales agreement, $60MM of the auction amount was to be acclimated to armamentarium two collective ventures amid Sorrento and NantPharma.
One of these collective ventures was the conception of a new Immunotherapy aggregation in affiliation with NantCell, a accessory of NantPharma, called NANTibody. NANTibody started with $100MM in berry funding, $60MM from NantCell and $40MM from Sorrento’s sales advance from IgDraSol, acceding 60% and 40% buying to NantCell and Sorrento respectively. In addition, NantCell appointed 3 lath associates to the 5 actuality lath with Sorrento appointing the actual 2. In consecutive years NANTibody spent almost little of its berry money and thus, banknote on duke remained at about $100MM.
In 2018 according to Sorrento’s latest 10-Q, the 3 associates of the NANTibody lath appointed by NantCell, voted to advertise all outstanding disinterestedness in IgDraSol for $90.1MM to NantWorks, LLC, including the rights to the CynviloqTM biologic product, afterwards alerting lath associates appointed by Sorrento. As a result, Sorrento has filed two acknowledged accomplishments alleging NantWorks, LLC purchased the appropriate to the CynviloqTM biologic artefact for the purpose of befitting it from advanced to market.
Anyone can abatement victim to fraud, if absolutely this is artifice as declared by Sorento, but this to me seems accidental by entering an according partnership. There is consistently added to the adventure but afterwards added advice from administration it is adamantine to accept why Sorrento entered into a affiliation with such abortive terms. See Transparency.
Heavy Debt Load
Sorrento currently has $356.5 of abiding debt outstanding according to its 10-Q which is abundant for its size. Additionally, administration is assured they accept abundant costs to accomplish their operating and basic requirements for the abutting year but if admission to debt dries up this could be adverse to Sorrento’s abiding viability.
There accept been questions on the authority of the contempo non-binding buyout action which materially afflicted the stock’s amount in contempo days. The columnist of this commodity posits “The takeover bid announcements accept been calmly timed appropriate afterwards the about-face of debt at $1.70 per share.” and “There is aloof too aerial of a anticipation of it [the buyout offer] actuality a clamminess accident for the affairs stockholders that benefited from a contempo agenda about-face at $1.70.” If this absolutely is an accident orchestrated by those with abutting ties to Sorrento for the purpose of influencing the banal amount it adds abutment to the altercation Sorrento is not actuality cellophane with its shareholders and could possibly arresting commodity added serious.
I am agreement a Hold appraisement on Sorrento Therapeutics due to the opaqueness of their business practices. On the apparent I like that Sorrento is bootstrapping revenue, leveraging their new admission to the acceptable Lidocaine patch, in accession to renting their growing assembly accommodation (assuming they will eventually use it to calibration assembly of their immunotherapy offerings). However, I would like to see them hit their balance for at atomic 2 quarters, as able-bodied as achieve outstanding acknowledged matters, and alpha accouterment added approved detail to their investors in the anatomy of balance calls, afore I feel adequate abacus them to my portfolio or advising others do the same.
Disclosure: I am/we are continued VOO. I wrote this commodity myself, and it expresses my own opinions. I am not accepting advantage for it (other than from Seeking Alpha). I accept no business accord with any aggregation whose banal is mentioned in this article.
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