Here’s Why I’m Not Selling My Sorrento Therapeutics Stock
June 9, 2020
Tim Bandou
On May 15th, 2020, Sorrento Therapeutics (Nasdaq: SRNE) made national headlines when its CEO declared they were developing an antibody cocktail which provides “100% inhibition” of SARS-CoV-2, the virus that leads to COVID-19, in preclinical studies.
Henri Ji, Sorrento’s CEO, claimed that the STI-1499 antibody completely blocks the interaction of the SARS-CoV-2’s spike protein with a human cell target receptor. In layman terms, this means that STI-1499 is able to prevent the virus from attaching to the host’s healthy cell, which is what leads to incubation and infection. He says Sorrento is developing the COVI-GUARD cocktail which he hopes will receive FDA approval for human testing.
source: Sorrento Therapeutics June 2020 Corporate Profile
Ji’s announcement caused the stock to surge almost 160%, jumping from $2.60 to $6.76 in a single day. In the space of a few hours, Sorrento’s market cap went from a few hundred million to well over billion dollars.
On May 15th, the stock price shot up +160%
Like many people, I got caught up in the frenzy and I made the very poor decision of buying at the absolute peak of the FOMO at well above $9 on May 15th. You can imagine my pain when the stock immediately tanked at the open and closed at under $7. Even worse, the dump continued over the next few days, and the stock eventually fell under $4.
What happened?
Well, the investing community immediately questioned his claims: how can anyone claim 100% success rate? The trials were done in vitro, but does that mean they will be successful on animals or humans? How can a small pharmaceutical company claim 100% inhibition when the big boys with massive R&D spending are struggling to produce effective treatments of their own?
For an obscure pharmaceutical company with just over $31M of revenues in 2019, and negative net income of $38M, these claims of 100% success looked very suspicious indeed.
Most rational observers came to the conclusion that Sorrento’s CEO was probably exaggerating the success ratio to either raise the share price for insiders to sell their stock on the unsuspecting public or raise the company’s profile to secure federal funding. Either way, the inevitable accusations of being a pump and dump scheme gained traction and a wave of understandable panic selling caused the stock to crash back down to the $4-$5 range.
Various law firms jumped on the band wagon and filed lawsuits against Sorrento “to recover damages against Defendants for alleged violations of the federal securities laws under the Securities Exchange Act of 1934” due to the company’s “materially false and/or misleading statements” concerning its “initial finding of “‘100% inhibition’ in an in vitro virus infection which will not necessarily translate to success or safety in vivo, or in person“.
All this speculation forced Ji to make a televised appearance a few days later where he adamantly stated that SRNE is “not a pump and dump” and that he would not be buying or selling equity due to having “insider information” that would constitute insider trading if he did. He exhorted investors to remain patient while the company works day and night to obtain FDA approval to test its antibody cocktail on humans.
These statements did not reassure investors and the stock continued its plunge, falling below $4 and struggling to break the $5 resistance.
Are the critics right? Is Sorrento Therapeutics a pump and dump scam?
I don’t think so.
Here are 7 reasons why I think Sorrento Therapeutics could be the real deal.
First, I’ve come to the conclusion that the lawsuits are probably frivolous. How can you sue a company mere days after a public announcement? Yes, the share price dropped significantly after the announcement, but that happens very often when stocks rally hard. I’m sitting on hefty losses but they are unrealized as long as I don’t sell my stocks. I think it’s prudent to wait until the FDA pronounces itself on whether or not Sorrento can proceed with animal/human testing before claiming they lied about having an effective cocktail. Lastly, what if the 100% inhibition claims were true? Does the law firm have conclusive evidence that’s not the case?
Second, Mount Sinai Health System and Sorrento have inked a deal to investigate the COVI-SHIELD™ cocktail. Mount Sinai announced the partnership with Sorrento on May 11th, a few days BEFORE Ji’s infamous 100% inhibition remarks. Mount Sinai is a very reputed hospital network located in New York City and I doubt such a prestigious institution would enter a partnership with a fraudulent company. They must have seen firsthand the in vitro experiments and deemed it promising enough to forge a partnership.
Third, Sorrento is conducting serious research in various domains, including cancer. Granted, this is not directly related to COVID research but shows that the company has some track record of producing the goods in at least one area. Sorrento recently entered in a binding term sheet to an exclusive license to ACEA’s Abivertinib across all indications for all territories outside of China. Abivertinib is a “is a novel small molecule tyrosine kinase inhibitor (TKI) that selectively targets both mutant forms of the epidermal growth factor receptor (EGFR) and Bruton’s tyrosine kinase (BTK)“. At the American Society of Clinical Oncology (ASCO) meeting in 2019, Sorrento presented “the results of an interim analysis of 209 response-evaluable patients (n=227 total) with non-small cell lung cancer (NSCLC) was presented. Of the 209 patients, the investigators determined that 90% (188/209) had tumor size reduction“. Sorrento is expecting to meet with the FDA to seek approval for oncologic indications. These development attest that the company is conducting serious work in a supremely important medical field.
source: Sorrento Therapeutics
Fourth, Sorrento’s COVIDTRAP™ trials have received positive feedback from the FDA. On June 5th, Sorrento released a statement saying they have “discussed with the Food and Drug Administration the development of this drug candidate and has received guidance on the path forward to a clinical trial for STI-4398, COVIDTRAP, for both the potential treatment of infected patients and as a potential prophylactic treatment to COVID-19“. If the guidance received was indeed positive, it indicates Sorrento is on the right track and Phase 1 trials could become a reality. But we aren’t there yet.
The fifth reason, for whatever its worth, is Ji’s admission that he is restricted from purchasing stock due to having insider information. Now, this is a very delicate matter and we should not take his statements at face value, because we never know what is going on behind the scenes. Ji said he bought the stock when it was in the $9 and $13 range so his cost average is high and he thinks it’s worth more than that. Right now, I think he has thrust himself in the public light to such an extent that it would be pure folly to go on national media and pump the stock just to dump it. This would lead to SEC investigations and possible jail time. I think he’s truly convinced that he has a potentially effective product on his hands and he believes the stock price will rise naturally as a result.
The sixth reason I’m optimistic is that Ji refused a $7 per share all-cash buyout offer in January. Ji did not mention who wanted to buy out the company, only stating that a private equity firm offered $7 per share to buyout Sorrento. Ji refused the offer, saying that the $1.15 billion evaluation was too low. Interestingly, he had refused two prior all-cash buyout offers in November 2019 of $3 per share and $5 per share respectively. I see this as a strong signal that Ji has big plans for Sorrento and plans to build it into a much more valuable company.
The final reason I’m optimistic is the $24 price target set by analyst Ram Selvaraju. This is not to be taken too seriously as analysts have the unenviable reputation of predicting the opposite of what happens. However, Tip Rank says that Ram’s prediction success rate is 58%, which is actually quite good. He most notably issued an early BUY rating on Bio Xcel Therapeutics (Nasdaq: BTAI), which generated a 663% return. Obviously, his price target on Sorrento stock only reflects his personal opinion but it’s reassuring to see that someone who has studied the company in depth believes is not a pump and dump scheme.
BONUS REASON: Institutional Ownership. In the recent quarter, The BlackRock Fund increased its position in Sorrento by 1.19%, taking its total share count to roughly 8 million shares, and The Vanguard Group also increased its position and now owns more than $14M worth of Sorrento stock. Various other investments firms also purchased equity in the last quarter and more than 1/3 of the company is currently owned by institutions. This is a positive signal because institutions invest for one reason only: to generate a substantial return on investment. I’m not one to bet against BlackRock or Vanguard and I’m pleased to see they’ve upped their ownership stakes. That’s a vote of confidence if I’ve ever seen one.
CONCLUSION
Yesterday, Ji made an appearance on Jim Cramer’s mad money to discuss the company’s recent developments. He didn’t announce anything major but he did say that he expects human trials to begin in 2-3 months if the FDA approves. In addition, he claims that Sorrento is trying to raise cash for research by establishing partnerships and submitting requests for federal funding.
For now, we have to take his word for it but the fact that he is providing a detailed update on national television in the midst of speculation and investor panic is a big positive for me.
There is no guarantee that Sorrento’s antibody cocktail will be effective for treating human patients but the in vitro tests are encouraging and it seems the company is well on its way to receiving FDA approval within a few months.
Thus, I will continue to sit on my heavy bags and wait for the FDA’s decision. I FOMOed into this stock but I see many positive signals so I refuse selling at a loss. I’ve seen enough to remain patient and see where Ji’s strategy leads. I think he’s earned my trust for now.
