Don’t Discount the Bears On Sorrento Stock

Sorrento Therapetics (NASDAQ:SRNE) has become the latest battleground stock in our Covid-19-focused world. Both sides can claim recent victories, as SRNE stock in five weeks has made a round-trip from $8 to $19 and back again.

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The long-term result remains unclear. Sorrento is one of dozens of companies targeting vaccines, tests or treatments for coronavirus, but one of the few attacking several of those categories. Success on any  front likely means SRNE stock is a multi-bagger; successes in more than one could make it one of the best stocks of the next decade.

Of course, there are reasons for skepticism as well. Less than a year ago, Sorrento was an oncology play, and a struggling one at that. And short-sellers — one in particular — have raised very real concerns. Sorrento’s own actions of late haven’t exactly dispelled those concerns.

From here, the risks seem not only real, but obvious. That doesn’t mean Sorrento is going to fail, or that SRNE stock is a short. But it does mean that investors need to understand those risks before even considering Sorrento as one of the coronavirus winners in biotech.

The “Bear Raid”

Of late, Sorrento has taken aim at short sellers it claims are manipulating SRNE stock. Three weeks ago, the company threatened legal action against Hindenburg Research, which had questioned the stock’s prospects for a number of reasons. Last week, chief executive officer Henry Ji said in an interview that “I’m giving [short sellers] a fair warning shot. Just cover yourself, don’t ruin your family.”

As many observers have pointed out, those are precisely the actions that are going to attract short sellers, not repel them. Solid, confident management teams should generally ignore the noise and focus on their business. (Though to be fair, Tesla (NASDAQ:TSLA) CEO Elon Musk has had his fun trolling short sellers for years now, and his stock and his business are performing wonderfully.)

More broadly, there’s nothing wrong with short-sellers criticizing a stock. That’s their purpose: to bring contrary views to the market. Yet they’ve become villains in recent years.

That’s disappointing for two reasons. First, shorts were instrumental in uncovering two of the biggest examples of corporate malfeasance of the last decade: Valeant Pharmaceuticals (now Bausch Health (NYSE:BHC)) and, more recently, Luckin Coffee (OTCMKTS:LKNCY).

Secondly, we’re in the middle of a bull market that has lasted for more than 11 years. It would be one thing if investors needed scapegoats. They shouldn’t. In this market, short sellers who have gotten their stories wrong have paid the price. That’s not market manipulation; it’s putting one’s money where one’s mouth (or pen) is.

What Did Hindenburg Get Wrong?

In the case of Sorrento, meanwhile, it’s still unclear exactly what Hindenburg supposedly got wrong.

Was it the quote from a article in which Ji said, “We want to emphasize there is a cure. There is a solution that works 100 percent.”? It would seem likely at this point that Sorrento would have asked for a retraction. There’s no evidence that it has done so — nor is there evidence, more than three months later, that Sorrento indeed has a cure with a “100 percent” chance of success.

Was it the fact that Hindenburg pointed out that Sorrento entered the second quarter with a dangerously weak balance sheet? Probably not: the firm’s facts are correct, according to Sorrento’s own 10-Q filing with the U.S. Securities and Exchange Commission. Sorrento finished the quarter with $22.5 million in cash after burning over $38 million in just the first quarter.

As a result, the company continued its longstanding pattern of dilution (a pattern highlighted by Hindenburg), selling nearly $80 million worth of SRNE stock in Q2 on top of almost $70 million in Q1.

Or was is the fact that Sorrento licensed its Covid-19 testing technology from Columbia University for just $5 million? That, too, is in the company’s filings with the SEC. Columbia took that tiny upfront payment and also asked for minimum royalties of just $1 million annually.

Red Flags with SRNE Stock

Hindenburg’s facts seem to be correct. And they are concerning.

If the Covid-19 test technology is so valuable, for instance, why did Columbia — an Ivy League institution — accept such a weak deal? OraSure Technologies (NASDAQ:OSUR), for instance, too is aiming to develop a saliva-based test. It has a market capitalization over $800 million. Why would Columbia take a measly $5 million with a nearly immaterial minimum?

Why did Ji say Sorrento had a cure, when its antibody-based treatment hasn’t even undergone live testing yet?

Why did the company cite “false and/or misleading statements” from Hindenburg without specifying what they were — or rebutting the supposedly untrue allegations?

And why was the chief financial officer summarily fired last month?

These are all real questions that need to be answered. They haven’t been yet.

To be fair, those questions don’t mean that Sorrento is a fraud. They don’t even mean that the company will be unsuccessful in its Covid-19 efforts. And they certainly don’t mean (to repeat) that this is a short, particularly given the retreat of the past few weeks.

But the questions should be asked — and they need to be answered. It doesn’t matter that a short-seller is the most public voice behind those questions. Investors shouldn’t dismiss a bear on a stock just because they’re short any more than they should believe a bull just because they’re long. Due diligence is required. And SRNE stock requires more than its fair share.

On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Vince Martin has covered the financial industry for close to a decade for and other outlets. 

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