Aug. 18 was a bad day for Sorrento Therapeutics (NASDAQ:SRNE). SRNE stock tumbled nearly 7% in after-hours trading on news that the company’s chief financial officer (CFO) Jiong Shao’s employment was “terminated in its entirety.”
The ouster of Shao comes on the heels of a critical report by Hindenburg Research. The report makes negative claims about one of Sorrento’s Covid-19 diagnostic products.
For its part, Sorrento is considering legal action for what it terms as “false and/or misleading statements for the sole apparent purpose of negatively manipulating the company’s stock price.”
The problem for Sorrento is firing its CFO lends credibility to a claim that was at the heart of the report. Namely that prior to making a bold announcement of a potential Covid-19 cure, the company was on the brink of insolvency.
Other than that, it’s been business as usual for Sorrento.
And what a business it’s been doing. Despite the selloff, Sorrento’s stock is up over 230% for the year. And the bulk of that gain has occurred since late May. That’s when the little-known biotech firm threw its hat (or multiple hats as it were) into the Covid-19 conversation.
SRNE Stock: What News Are Investors Selling?
Will Ashworth recently wrote about how CNBC’s Jim Cramer was perplexed about what Cramer described as “clueless buying” on Sorrento stock. It wasn’t that Cramer wasn’t bullish about Sorrento, he was just surprised that it took the market so long to catch up to the potential game changing news of its Covid-19 “spit test”.
Not surprisingly, SRNE went even higher and, on Aug. 10, its stock closed at $18.80. But since then the stock is down over 40%. And most of that occurred before the news about Shao.
To me, this says there’s more going on. And in my estimation, SRNE bulls are trying to get the price down to a more palatable level from which they can drive the stock higher.
But should they?
Sorrento Is Selling Hope
Recently, InvestorPlace contributor Dana Blankenhorn commented on the three distinct stories that have driven Covid-19 investments. As Blankenhorn wrote: “There is a market for cures. There is a market for vaccines. And there is a market for tests.”
I’ll add a market that is a halo above them all, a market for hope. I’m not saying its technology can’t work. If you want to know more about the science, please read this article by Josh Enomoto. As someone who formerly worked with Sorrento, he can provide better insight into the science behind the company’s claims.
What I’m saying is Sorrento claims that its spit test can produce results in 30 minutes. These results are not peer reviewed. However, it claims 97% accuracy for positive tests and, equally importantly, 100% accuracy for negative tests. Furthermore, Sorrento states that the test would be available for the price of a few cups of coffee.
That’s a strong cup of hope. And that’s just one leg of Sorrento’s three-prong Covid-19 approach. But is hope enough?
The Bullish Case for Sorrento Is an Enigma
There’s no doubt that having available, accurate testing is essential to containing the spread of Covid-19. But isn’t the goal to have a cure and/or a vaccine?
And if we have either, or both, doesn’t that make the risk of asymptomatic transmission (which is really at the crux of all of this) less worrisome?
And wouldn’t that mean there’s less need for a test? After all, with proven treatments, individuals who don’t get a flu shot aren’t prohibited from attending a public gathering or getting on a plane. They’re certainly not lining up to be tested for influenza when they’re asymptomatic.
But wait. As it turns out Sorrento is working on a vaccine candidate. However they’re far behind other companies. And even if they’re successful, they lack the size to produce a vaccine at scale.
But wait. Getting back to the trouble that led to the ouster of Sorrento’s CFO, they claim they may have identified a cure. And with this cure, patients would not need a vaccine.
It becomes very difficult to get your mind around what Sorrento is selling. But then again I may be easily confused. What it says to me is that Sorrento is hoping that investors will keep buying the hope that they’re selling. This doesn’t mean Sorrento Therapeutics stock still can’t rise. Hope is a powerful catalyst. However, when and if hope fades, many stock holders can be left holding the SRNE bag.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for Investor Place since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
