From Seeking Alpha
Sorrento Therapeutics Is Still A Buy
Apr. 11, 2021 12:06 PM ETSorrento Therapeutics, Inc. (SRNE)4 Comments
Summary
Sorrento Therapeutics recently announced the acquisition of ACEA Therapeutics.
ACEA's acquisition brings to Sorrento the late clinical-stage Abivertinib.
The company received a supplemental new drug application approval from FDA for its lidocaine topical system ZTlido.
A couple of months ago, I wrote an article about Sorrento Therapeutics (SRNE) where I explained that the combination of a strong proprietary research pipeline with a high short interest in the stock could lead Sorrento to generate interesting returns.
Unfortunately, things turned out to follow a different path with the stock that has since then almost halved its price.
In this article, I want to provide an overview of the financial results for FY2020 and an analysis of the business development activities recently undertaken by Sorrento Therapeutics. Indeed, I still believe that Sorrento – despite its volatility - might be a good stock to monitor for investors interested in long-term returns.
According to the 2020 10-K form, Sorrento Therapeutics reports revenues of $39.9 million, up ca 27% from the previous year ($31.4 million): about 33% of sales come from service activities while ca 66% comes from the sales of products. More in detail, product sales are fully comprised of sales of ZTlido - the branded lidocaine topical delivery system – which, for the time being, is sold to just one customer in the United States.
Operating costs for FY2020 are $284.5 million, ca 2% lower than the previous year, with ca 40% being represented by research and development expenses. EBIT for the year is negative at -$244.5 million versus the -$259.3 of FY2019. The overall net loss for the company, after interests and taxes, is $314.4 million, slightly better than the -$363 million of the previous year (ca. -13%).
In terms of cash flows, Sorrento Therapeutics registered a -$25.5 net cash flow, therefore reducing its cash and cash equivalents position from $80.7 million at the beginning of the year to $56.4 million at year-end.
As one can expect, both cash flow from operations and from investing activities are negative, respectively at -$159.5 million and -$39.9 million. Cash flow from financing activities is positive at $174.2 million. It is worth pointing out that the main source of financing for FY2020 was represented by proceeds from the issuance of common stock for equity offerings.
Acquisition of ACEA Therapeutics
On April 5th, Sorrento Therapeutics announced it had entered into a merger agreement to acquire ACEA Therapeutics. The acquisition brings to Sorrento late clinical-stage “Abivertinib and an extensive proprietary library of small molecules, which potentially have applications for numerous human disease indications”. In my opinion, the gem in ACEA’s portfolio is represented by the Abivertinib, a “small molecule tyrosine kinase inhibitor (TKI) that selectively targets both a mutant form of the epidermal growth factor receptor (EGFR) and Bruton’s tyrosine kinase (BTK)”.
Moreover, the acquisition will also help Sorrento Therapeutics to enter the Chinese market. Indeed, the acquisition includes ACEA’s cGMP facility located in Quzhou, China, on a 23-acre facility with five buildings, that has the capacity to produce up to 5 tons/year of active pharmaceutical ingredients and 50M capsules of final product.
From a financial point of view, ACEA Therapeutics shareholders will receive $38 million in Sorrento common shares at deal closing and potentially up to $450 million in additional consideration subject to the achievement of sales targets of the assets obtained in the acquisition.
ZTlido label expansion
On April 9th, Sorrento Therapeutics announced that it had received “a supplemental new drug application (SNDA) approval from the FDA for ZTlido® to make efficacy labeling change with clinical data”.
As you might know, ZTlido is a lidocaine topical system that has been developed by Sorrento Therapeutics with the purpose, among others, to sustain water stress conditions. With the label extension, the FDA is finally approving the use of ZTlido while showering, swimming and bathing. I think that this news is of incredible relevance for Sorrento because it gives the company a huge competitive advantage since other lidocaine topical systems cannot be used when wet and must be removed before water exposure. The widening of the ZTlido application range might help Sorrento to boost its revenues from product sales.
Short interest evolution
When I wrote the previous article (02/03/2021), Sorrento Therapeutics had about 70.4M shorted shares out of 262.9M outstanding shares, in other words, Sorrento had a 26.8% short interest. Today, the volume of shorted shares is lower, ca 56M, leading to a ca 21% short interests. Despite the percentage not being negligible, I do not think that the short interests alone will be enough to generate an upward movement.
Conclusion
As I stated in the previous article, I still believe that Sorrento Therapeutics is a stock worth buying since its solid pipeline of research projects, once approved, could provide strong revenues and cash flow generation supporting a stock price upward movement. The recent news of ZTlido label expansion and ACEA acquisition demonstrates that Sorrento Therapeutics is actively moving forward in its business development activities and that the company itself has a strong commitment to its research projects.
Overall, the current stock price of $7.51 per share (04/09/2021) could represent a proper entry point.
This article was written by
Simone Francesco Sala
