From relative obscurity to becoming one of the hottest names on Wall Street, Sorrento Therapeutics (NASDAQ:SRNE) stock has enjoyed quite a ride. In recent weeks, Sorrento’s CEO, Dr. Henry Ji, has made astounding claims, first regarding an incredibly effective treatment for the novel coronavirus and second, a quick, cheap and accurate testing diagnostics mechanism. With so much interest in this space, it’s no wonder that SRNE stock has skyrocketed.
Still, all investments have risks. Given the extreme sentiment in the biotechnology space, I’ve got to question whether the enthusiasm is getting overheated.
For the purposes of this article, I’d like to pose three questions that all prospective buyers should ask before taking a position in SRNE stock.
Before I get to this, though, I recognize that some segments of the investing community have become aggressively vitriolic. So, let’s take a breather and cool down the temperature.
I previously worked at Sorrento Therapeutics, so I know the company reasonably well. In addition, the organization has treated me generously and has given me a letter of recommendation. I have zero incentive to bad mouth them.
At the same time, you must separate the science of SRNE stock and the business of it. And what I’m seeing is a complete disconnect between the investment thesis and buyer rationale. If you want to buy Sorrento shares, great! But do so because you understand what you’re doing, not because someone will call you “beta” if you don’t.
Speaking of which, if you want to discuss this (or any) story with me, write to me at email@example.com. Forget the cyberstalking, anonymous threats and other shenanigans. Let’s be real alphas.
The Premise Behind SRNE Stock
Before we begin, it’s important to establish that Sorrento Therapeutics is primarily an oncology firm. Its laboratories were built out for antibodies. Keep this in mind as it will crystallize my argument later.
Presumably, though, Sorrento saw an opportunity with the novel coronavirus. And no one should blame management for that. If life gives you lemons, make lemonade. Clearly, Sorrento took that to heart and delivered a two-front solution to our battle against Covid-19.
First, Sorrento is developing its antibody STI-1499, which “could serve as an effective treatment in blocking the virus,” according to San Diego’s CBS8.com. Second, Sorrento developed a 30-minute spit test for Covid-19. It’s the latter point where I wish to direct my analysis. According to Barron’s:
A paper by the Columbia University Medical Center team that developed the test, published in June on a so-called preprint server and not yet peer reviewed, said that the test had a true positive rate of 97%, and a true negative rate of 100%, based on 60 samples.
What’s more, competitor Abbott Laboratories (NYSE:ABT) has suffered setbacks regarding its testing accuracy. If Sorrento’s claims are proven valid through additional testing and peer review, it could change the game for SRNE stock. As well, to Dr. Ji’s point, “You could open up the whole country, the whole society.”
And if Sorrento found the cure for all diseases, SRNE stock would trade at a monumental premium. But as you know, anyone can make claims. Here are three questions to consider, beginning with the pivot.
Will the Abrupt Shift Work?
As I stated earlier, Sorrento is an oncology firm. So, while I don’t blame them for making the hard transition to Covid-19 therapies and diagnostic testing, it should give you some pause about getting too deeply involved with SRNE stock.
At the very least, you should consider the probability of a hard pivot being successful. Bear in mind that the leaders in the diagnostic space are Abbott and Roche Holding (OtherOTC:RHHBY). As I just mentioned, Abbott has fielded many questions about its testing accuracy. It’s hard to believe that Sorrento won’t at least face some setbacks when rigorous testing, including peer review and broadening the test sample size, are incorporated.
As well, Sorrento is behind Gilead Sciences (NASDAQ:GILD) in the therapy field. That’s not to say that SRNE stock will collapse from here on out. Some biotechs have successfully pivoted their operations. And being behind isn’t a death sentence.
However, it’s fair to point out that when time is of the essence, being behind is not ideal.
Questions about Colorimetric Accuracy
While most SRNE investors know about the spit test, arguably few have deep dived into the details of it. I’m only going to give a summary. With that said, if you’re going to bet the house on SRNE stock, you better do your due diligence.
The basis for Sorrento’s diagnostic test involves a scientific technique called colorimetry. According to Columbia University’s research paper — and please read this if you’re going to gamble on SRNE stock — the test works via a heavily modified process called Reverse Transcription Loop-mediated isothermal Amplification.
Again, read the paper for the details. But in summary, Sorrento’s test involves technicians applying fluorophores that bind to the Covid-19 RNA and amplifies it relative to the testing background. The fluorophores emit wavelengths visible to the human eye (yellow is positive, red is negative). Hence, the results are given colorimetrically, but also — and this is a huge question mark — qualitatively.
What happens if the test result arrives to an “in between” color, like orange? How would you interpret this data? This is why peer review is so important in science and particularly with biotech claims.
Also, colorimetric tests aren’t the most reliable. And this is a crucial point longer term, especially if these tests are going to determine who gets to fly on an airplane, as an example.
Economics of Sorrento’s Testing May Not Pan Out
What appeals to investors of Sorrento Therapeutics stock is that the underlying test isn’t just quick and accurate but also cheap. That should immediately trigger skepticism because we’ve seen radical claims before about the marriage of convenience, cost and accuracy. In its most extreme case, we have disgraced Theranos founder Elizabeth Holmes.
I’m not comparing Sorrento to Theranos, so please stop typing. What I’m saying is that you should apply the same skepticism to any biotech claim as you would promises from a used-car salesman.
Indeed, many biotech experts have raised questions about the actual cost required to roll this out. Remember when I said that Sorrento is in the antibodies business? Well, who’s going to manufacture the diagnostic tests, along with the specialized enzymes necessary to actualize these tests? It has to be contracted out, which will add to the overall costs.
Speaking of enzymes, the tests require tons of them and other reagents. And that’s per sample, folks! In addition, Dr. Tal Raviv tweeted that Sorrento’s tests will require mini warmers, collection tubes, and prefilled regents. Plus, according to his post, it will take months to commercialize at best.
Please don’t attack Dr. Raviv. He’s merely speaking sense to the mania.
Some might retort, who cares if the tests come in more expensive than advertised? Well, if it gets too expensive, it may turn into a political and PR nightmare.
Consider that the Covid-19 pandemic has disproportionately affected communities of color. We’re not just talking about health-related challenges but also economic pain.
Now imagine that this easy, convenient test is priced largely for well-to-do folks. It’s just not a good look as I’m sure you can understand.
SRNE Could Still Be a Winner
As I mentioned near the top, you have to separate the science of SRNE and its business, in this case, the investment proposition. Know that when you buy Sorrento shares, you’re mostly gambling that the science works out. And it very well could. But believing it could go well and actually going well are two different concepts. Also note that things can go awry, as it did for Abbott.
However, there’s another element at play — extreme enthusiasm for SRNE stock. And this alone, for the time being, can skyrocket shares. Thus, I wouldn’t be bearish on this company, no way. Heck, I might even join you fine folks for a quick turn at the casino.
But at some point, those who have profited handsomely will exit the markets. When they do, we could see a dramatic collapse in SRNE. No one knows when that will be. But I advise that if your investment thesis involves waging a “war against the shorts,” you’re directing your vitriol at the wrong party.
It’s the longs — those that have been stirring themselves into a frenzy — that you have to worry about.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.