Eyes were popping when Sorrento Therapeutics (SRNE) shares went ballistic in mid-May. The price shot up from $2.62 per share to $9.96 in a single day, a gain of 380%. Unfortunately, Sorrento’s climb was halted just as fast when the stock sank 11.5% two days after.
From the look of it, investors eventually sobered up after the initial excitement and realized that the announcement on Sorrento’s pre-clinical results promised too much too soon for a Covid-19 vaccine.
What does this mean for this company?
This rollercoaster situation is par for the course when it comes to small biotechnology companies such as Sorrento, which has a market capitalization of only $1.15 billion.
Extreme volatility is commonplace, with investors getting all riled up the moment a bit of positive news gets out only to balk the moment they fully digest the nitty-gritty of the announcement.
Get used to it. It is a new factor in the market that is roiling prices daily.
Before I discuss Sorrento’s merits and downsides further, here’s a brief background on the good news that got everyone all excited in May.
As you must have guessed by now, the company’s announcement centered on the coronavirus disease (COVID-19).
According to Sorrento, they have hit upon an “exceptionally potent antibody” for this deadly disease. The experimental “cure” is currently dubbed STI-1499.
The breakthrough hit the airwaves after Sorrento’s CEO contacted a Fox News reporter to discuss their discovery, with the executive saying that they have “a solution that works 100%.”
The company is working with Mount Sinai Health System to assess whether STI-1499 can function as a stand-alone therapy as well as a component of an antibody cocktail designed to fight off the SARS-CoV-2 virus, which causes COVID-19.
STI-1499 works by blocking the virus from attaching itself to the body, thereby effectively protecting the cells from infection.
Needless to say, the success of this antibody means big bucks for Sorrento.
It’s critical to bear in mind that results from tests conducted via test tubes and Petri dishes do not guarantee success when applied to human clinical trials -- and this is exactly the problem with Sorrento’s recent results. Cancer has been cured in rates over 100 times.
The STI-1499 trial results were all collected from lab tests. Sorrento has yet to advance to the early-stage clinical study phase. This means that the experimental vaccine is from a slam dunk at this point.
Simply put, STI-1499 has yet to be tested on living things like a mouse and then of course, on humans.
If history is any indication, then Sorrento should be prepared to handle questions about STI-1499’s efficacy. After all, less than 1 in every 5 experimental drugs designed for infectious diseases actually receives FDA approval.
To make things even more challenging for Sorrento, the company isn’t alone in thinking that an antibody regimen could be used against COVID-19.
Prior to this announcement, news has already broken out that Eli Lilly (LLY) and Regeneron Pharmaceuticals (REGN) are also studying similar kinds of approach for this disease.
Beyond its COVID-19 efforts, Sorrento only has one approved product: topical medication ZTlido. This drug, commercially released in 2018, is used to ease the pain brought about by shingles.
Since its launch, ZTlido hasn’t turned out to be a big moneymaker for Sorrento. In the first quarter, this treatment has raked in only $5.2 million in revenue.
Looking at the company’s recent earnings report, it’s clear that Sorrento has been spending more than it’s making so far.
In the first quarter of 2020 alone, the biotechnology company reported $69.2 million in net loss.
Compounding this situation is Sorrento’s fast-depleting cash to fund its operations, with the drugmaker posting a total of $21.9 million in cash and cash equivalents in the year’s first quarter.
Without coming up with more ways to generate additional capital, Sorrento doesn’t have enough bandwidth to keep the lights on any longer much less fund an aggressive coronavirus program.
As for its pipeline, the biotechnology company has two experimental oncology drugs ready for Phase 2 of their clinical trials. Sorrento also has a number of early-stage studies focusing on cancer and pain.
With all these in mind, the question remains: Is Sorrento stock worth buying today?
Although it can be tempting, exhilarating even, to run after a high-flying biotechnology stock plastered all over the news, the wise move would arguably be to restrain yourself and stay on the sidelines -- for now.
If STI-1499 fails in the clinical trials, then all of Sorrento’s gains would be wiped out instantaneously.
What I know so far in terms of the company’s plans to raise more funds is that a public offering might happen soon. If that happens, then the value of the existing Sorrento shares will be diluted.
So if you’re confident to take this gamble of either losing half your money or making it multiple times your initial investment, then this might just be your cup of tea.
However, I can see too many unknown variables for Sorrento to be a compelling stock to buy at the moment.
While Sorrento looks to be offering promising products and is on its way to fueling growth through capital fundraising methods, I have doubts on its ability to cash in big on COVID-19.
One reason is that I find the company’s timing a bit off. On top of that, I’m also not convinced on their capacity to execute particularly in terms of manufacturing.
Most importantly, Sorrento’s is not even considered as the frontrunner in the COVID-19 vaccine race.
I would prefer to wait and see how STI-1499 performs in at least two more stages of clinical trials.
At the very least, these studies would be able to give us a hint at how safe and effective the experimental vaccine is. Right now, I think there are a number of other biotechnology stocks that can provide more reasonable and even attractive risk-reward propositions.
