Sorrento Therapeutics, Inc. (NASDAQ:SRNE)

CAPS Rating: 1 out of 5

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Member Avatar clangmead (21.48) Submitted: 8/25/2015 1:37:04 PM : Outperform Start Price: $12.29 SRNE Score: +4.58

mp1

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Member Avatar pchop12316 (83.44) Submitted: 8/21/2015 11:15:27 AM : Underperform Start Price: $12.72 SRNE Score: -5.40

likely to have more price drops

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Member Avatar zzlangerhans (99.75) Submitted: 5/15/2015 5:51:10 PM : Underperform Start Price: $12.53 SRNE Score: -12.39

I had Sorrento flagged for an outperform under 11 after I first reviewed the company in February. In April I got my wish when the share price dropped as low as 9 amidst sector-wide instability, but I didn't notice. I was busy trying to get my prepaid data SIM card turned on in Delhi. They make you pay for the thing and then tell you it will be activated in six hours. Guess what usually happens?

I never did get any data on my phone in Delhi, so my daily internet usage was relegated to the one hour or so between my daughter falling asleep and my becoming too exhausted to keep staring at the screen of my laptop. That was barely enough time to keep track of my active positions, so pretty much everything else fell by the wayside. Now I'm findings myself betting against Sorrento after the stock spiked on announcement of a deal to sell lead candidate Cynviloq to a subsidiary of Patrick Soon-Shiong's NantWorks for 90M upfront and up to 1.2B in regulatory and sales milestones.

Whats not to like about this deal? Just a couple of things. First of all, the deal is heavily backloaded. Sorrento now has a market cap of 472M with 72M in cash and 90M soon to arrive. They no longer own any rights to Cynviloq, so their 310M enterprise value is now based on the Cynviloq milestones, novel analgesic resiniferatoxin in early stage clinical trials for intractable cancer pain, and the G-MAB antibody library. There's no guaranteed non-dilutive cash anywhere in that list. Backloaded deals are less desirable than frontloaded deals for obvious reasons, but they are common occurrences in biopharma when the smaller company doesn't have a strong negotiating position. The weird thing here is that Cynviloq was sold, not partnered, to NantWorks. That kind of deal is rarely backloaded, and now Sorrento has very little control about the developmental and regulatory process on which the future value of their company is largely predicated.

The second weird thing about the deal is that Patrick Soon-Shiong is already closely associated with Sorrento through a NantWorks equity investment and a collaboration on the G-MAB pipeline. In fact, some commentators perceive Sorrento as being largely controlled by Soon-Shiong. If that's the case, then he may be simply shuffling pipeline assets between his holdings to generate outside interest. Philip Frost is well-known for employing this tactic, although it seems to have served him well with Opko.

CAPS managed to find the day low of the stock to initiate my red thumb so it could be a while before I'm able to close this for a win even if I'm right about the deal not adding much value to the company. On the other hand, if the share price continues to grow without new positive catalysts this may become a candidate for a very careful short.

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Member Avatar SmartAce (99.90) Submitted: 12/19/2014 2:55:49 PM : Underperform Start Price: $8.19 SRNE Score: -63.12

Following jed once again with another pick.

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Member Avatar jed71 (99.40) Submitted: 12/17/2014 1:43:04 PM : Underperform Start Price: $8.02 SRNE Score: -66.44

I have been looking at this one this morning for quite some time wondering 1) why in the heck is this moving higher off of such mediocre news 2) I am surprised this can be shorted and 3) there aren’t many folks out there shorting it. Lots and lots and lots of red flags on this one. I’ll start with the most obvious:

“STI was originally incorporated as San Diego Antibody Company in California in 2006 and was renamed Sorrento Therapeutics, Inc. and reincorporated in Delaware in 2009, prior to the Merger. QuikByte was originally incorporated in Colorado in 1989. Following the Merger, on December 4, 2009, QuikByte reincorporated under the laws of the State of Delaware, or the Reincorporation. Immediately following the Reincorporation, on December 4, 2009, STI merged with and into QuikByte, the separate corporate existence of STI ceased and QuikByte continued as the surviving corporation, or the Roll-Up Merger. Pursuant to the certificate of merger filed in connection with the Roll-Up Merger, QuikByte's name was changed from QuikByte Software, Inc. to Sorrento Therapeutics, Inc., or the Company.”

“Immediately following the consummation of the Merger, the: (i) former security holders of STI common stock had an approximate 75% voting interest in QuikByte and the QuikByte stockholders retained an approximate 25% voting interest, (ii) former executive management team of STI remained as the primary continuing executive management team for the Company, and (iii) Company's ongoing operations consisted solely of the ongoing operations of STI. Based primarily on these factors, the Merger was accounted for as a reverse merger and a recapitalization in accordance with generally accepted accounting principles in the U.S., or GAAP. As a result, these financial statements reflect the: (i) historical results of STI prior to the Merger, (ii) combined results of the Company following the Merger, and (iii) acquired assets and liabilities at their historical cost, which approximates their fair value at the Merger date. In connection with the Merger, the Company received cash of $104,860, other current assets of $20,150 and assumed accounts payable of $24,624.”

So this was formed out of a reverse merger and used to be a software company. If you go back through the filings they have been on a buying spree of drug company candidates in late 2013, but I will note they aren’t paying very much (makes one wonder if they are really worth anything at all). They have recently released the following news and the stock has shot almost 100% higher.

“Sorrento Therapeutics Announces strategic investment by and collaboration with nantworks founder Patrick soon-shiong for the advancement of cancer immunotherapies”

I just don’t see how this news justifies this price spike. They are no closer to a new drug – just have a partnership and maybe a little more funding. The financials are pretty bad too. Current cash burn is just under $30MM a year and they just had to sell shares for additional cash at $5.25 a share.

“In May 2014, the Company closed an underwritten public offering of 4,765,000 shares of common stock, at $5.25 per share, and in June 2014, closed the full exercise of the over-allotment option granted to the representative of the underwriters to purchase an additional 714,750 shares of its common stock, with total gross proceeds of $28.8 million, before underwriting discounts and commissions and other offering expenses payable by the Company.”

Market cap of $235MM seems EXTREMELY excessive for this company. TANGIBLE Assets are at $49MM with intangibles around $55MM. If you remove the intangibles, total equity left for shareholders would be about $15MM, or about $0.53 a share. They have cash of $44MM so probably don’t need funding for at least 12-18 months. 9MM in shares outstanding in 2009 to 28.5MM in 2014? That represents 26% dilution every year for the past 5 years – that is a huge number. Dilution in just the past 5 quarters has been nearly 12MM shares. It’s important to note that much of this has been stock issued to purchase these small biotech firms.

“In March 2014, the Company entered into an amended and restated loan and security agreement, increasing the September 2013 facility to $12,500 from $5,000, with the same two banks, which was funded at closing. The interest rate on the amended and restated loan is 7.95% per annum. The Company will make interest only payments on the outstanding amount of the loan on a monthly basis until October 1, 2014, after which equal monthly payments of principal and interest are due until the Term Loan maturity date of September 30, 2017. Management believes the Company has the ability to meet all obligations due over the course of the next twelve months.”

Strange that they feel the need to borrow $12,500 DOLLARS when they are already so adept at issuing new stock and press releases. Bad company plus bad pedigree = bad investment. AVOID.

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