Sorrento Therapeutics Is a Scary, Risky Potential Buy

I last wrote about Sorrento Therapeutics (NASDAQ:SRNE) on Aug. 7. At the time, I suggested that SRNE stock wouldn’t have nearly as easy a run in September and October as it had in July and August. 

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As Maxwell Smart would say from the 70’s television show, Get Smart, “I missed it by that much.”

Two weeks after my article, Sorrento fired Chief Financial Officer Jiong Shao, sending its stock into freefall. In approximately three weeks, SRNE has lost nearly half of its value, dropping from a closing price of $12.28 on Aug. 18. 

As I write this, it’s trading at $6.32, well off its 52-week high of $19.39, a level hit just three days after my commentary. The first third of August was pretty good for long-time shareholders; the final two thirds, not so much. 

Where to next? Is it a value play at the moment? I don’t think so. Here’s why. 

What’s Behind the CFO Firing?

As best as I can tell — and this is only speculation on my part — Shao was let go because he didn’t do a good enough job insulating the company from possible detractors. According to an Aug. 12 statement from the company, it uncovered fraudulent attempts by Hindenburg Research to manipulate its stock negatively.

“Sorrento will collaborate with law enforcement and regulators to ensure that any criminal activity is investigated and rectified.  Sorrento, through its legal counsel, Paul Hastings LLP, has demanded that the organization cease and desist from illegal and wrongful activity and retract false and/or misleading statements. Sorrento is also considering legal action,” the company’s press release stated. 

When the stakes are high, people will go to great lengths to gain financially. That is just as true for Sorrento’s insiders as it is for the people behind Hindenburg Research. Ultimately, it is the markets that will decide who’s the wrongful party. 

As my colleague, Vince Martin, recently stated, many of Hindenburg’s arguments carry real weight. They aren’t airy-fairy hypotheticals. 

“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,” Martin wrote on Sep. 2. “It has a market capitalization over $800 million. Why would Columbia take a measly $5 million with a nearly immaterial minimum?”

Why, indeed?

I urge you to read Martin’s entire article. He makes a compelling argument about why investors should have questions about Sorrento. 

Until investors understand why the CFO was abruptly fired, I wouldn’t touch SRNE stock with a 10-foot pole. Not even at $6 and change. It’s radioactive until then. 

The Financials Don’t Justify the Valuation on SRNE Stock

Sorrento is currently trading at 31 times sales. However, biopharmaceutical development companies don’t tend to generate meaningful sales until a drug treatment or therapy makes it to the commercialization stage. Still, it’s something to keep in front of you as you evaluate whether to buy its stock or not. 

As my colleague mentioned, Sorrento raised almost $150 million in the first two quarters of the fiscal year. Yet, it finished the end of June with just $24.4 million in cash on its balance sheet. If you take into consideration the $166.2 million in short- and long-term debt, it’s hard not to conclude that it’s severely challenged from a financial perspective. 

Perhaps that’s why it chose to close its recent $19.4 million acquisition of Boston-based SmartPharm Therapeutics with 1.76 million shares of its stock. Right now, the people at SmartPharm are underwater in that deal.

After seeing AstraZeneca (NYSE:AZN) briefly pause its promising novel coronavirus vaccine trial due to an unexplained illness by one of the volunteers, it’s a stark reminder that when Chief Executive Officer Henry Ji said it had a cure, that wasn’t entirely accurate. The saliva-based test is still awaiting approval from the Food and Drug Administration for Emergency Use Authorization. 

If approved, the company says it can produce five million test kits per month. Perhaps that’s why Dawson James analyst Jason Colbert believes SRNE stock is a buy with a 12-month target price of $21

The Bottom Line

If you’re an aggressive investor, buying Sorrento at $6 is a much better risk-to-reward proposition than buying it a month earlier in the high teens was. 

As I said in early August, and again today, I wouldn’t touch this stock, but that doesn’t mean you shouldn’t. It’s high-risk, and potentially, high reward. But scary as all get out.  

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

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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