Sorrento Therapeutics (NASDAQ:SRNE) has been awfully busy over the past seven weeks. At the moment, however, all that action is not doing much for SRNE stock.
Over the last month, the stock has lost around one-third of its value.
To be fair, SRNE stock is not alone. The likes of Novavax (NASDAQ:NVAX), Moderna (NASDAQ:MRNA), and Inovio (NASDAQ:INO) have all seen declines. Even Eli Lilly (NYSE:LLY), a diversified pharma with a $126 billion market capitalization, pulled back 8% in eight sessions. That’s a huge move for that traditionally low-volatility stock. But theirs haven’t been as severe.
Obviously, the recent pressure on SRNE stock is due at least in part to outside factors. Investors may have seen the overall run in coronavirus plays as a bit stretched, particularly after stumbling blocks in development efforts for both Lilly’s antibody treatment and Johnson & Johnson’s (NYSE:JNJ) Covid-19 vaccine.
But it’s worth noting that SRNE stock’s decline has come despite a flurry of news releases and regulatory filings from Sorrento recently. Given the performance of Sorrento, investors may well be seeing the news as a negative, not a positive. They may not be wrong, either.
Multiple Shots on Goal
Sorrento was busy to begin with. Most smaller companies aiming to fight the coronavirus are taking relatively targeted approaches. They’re focusing on the vaccine side — like Moderna and Novavax — or on the treatment side, like Vir Biotechnology (NASDAQ:VIR).
Sorrento, however, is trying to tackle every aspect of the pandemic. It’s a vaccine play, a treatment play and even a testing play.
From one perspective, that strategy makes SRNE stock all the more attractive. After all, Sorrento doesn’t need all of its efforts to pan out. One win might well be enough to move SRNE stock higher, given a current market capitalization of just $1.8 billion. An approved vaccine and, say, success on the testing front could suggest far larger upside.
But there’s another viewpoint: Sorrento is trying to do too much. Like a restaurant with a large menu, it may wind up doing none of it particularly well. Meanwhile, rivals in each of the end markets have financial resources and management teams that remain laser-focused on one area, and in many cases just one product.
Time will tell whether Sorrento’s strategy proves successful, and which current perspective proves correct. But the fact that SRNE stock has underperformed other coronavirus plays during this selloff suggests that investors are starting to take a side.
Even More Going On
After all, even with such a broad reach to begin with, Sorrento in recent weeks has added even more to its proverbial plate.
On Sep. 2, Sorrento closed its acquisition of SmartPharm, which is developing gene delivery platforms for Covid-19 treatments. That deal cost almost $20 million in SRNE stock. Then, 12 days later, the company announced a license agreement with the respected Mayo Clinic for another platform that will be part of Sorrento’s legacy oncology business.
The company hasn’t slowed much in October. On Oct. 2, Sorrento said it had found a “small molecule” that showed promise in vitro. On the Oct. 12, Sorrento disclosed that it had licensed yet another technology, this a stem-cell based treatment for a respiratory syndrome caused by the coronavirus. Sorrento said it would take over a Phase 1 trial for the candidate.
Two days later came news that a large-scale Phase 2 study of abivertinib, a Covid-19 treatment, had been approved in Brazil. The same day, a filing with the U.S. Securities and Exchange Commission (though, oddly, not a company press release) announced the acquisition of ACEA Therapeutics. Sorrento had acquired the rights to abivertinib outside of China from ACEA in July. Now, according to the filing, the company is paying $38 million for the company, with milestone payments that could reach $265 million along with a 5% royalty.
In seven weeks, Sorrento seemingly had at least a year’s worth of activity.
Good News for SRNE Stock?
And, until recently, investors seemed to like that activity. It’s hard to pin down precisely why such a volatile stock in an often-volatile sector moves, but starting in early September SRNE had reversed a steep pullback, doubling from $6 to $12 before the recent pullback. At the least, investors obviously didn’t take the whirlwind of news as a negative for the stock.
That rally admittedly makes some sense, particularly for investors bullish on the stock coming into September. After all, the bull case for Sorrento relative to other coronavirus plays is precisely that it has so many opportunities.
But the bear case actually has a similar basis. And as I’ve written before, investors can’t discount that bear case just because SRNE has a heavy short interest. To a skeptic, the news of the past few weeks only raises more significant questions.
Two in particular stand out. The first is: why are all these moves still necessary? Sorrento wasn’t acting two months ago as if it needed more technology, better antibodies, more assets or more options. It was on Aug. 27, after all, that chief executive officer Henry Ji told those short sellers, “Just cover yourself, don’t ruin your family.” Yet Sorrento now is issuing stock and paying royalties to build out platforms that, as Ji said earlier this year, supposedly were ready to cure the coronavirus. This comes after short-seller Hindenburg Research questioned the value of the license agreement underpinning Sorrento’s saliva test. (Sorrento said it would sue the firm, but does not appear to have filed such a suit as of yet.)
The second gets to a similar point. Why is ACEA selling a potential coronavirus treatment for just $38 million? Yes, the royalty and milestones have value. But Sorrento gets most of the upside, while selling shareholders are protecting their downside at a seemingly low price. If Sorrento truly is getting such a great deal, meanwhile, surely it would want to trumpet that deal with another press release. No such release appears on the company’s site or in SEC filings.
Again, the bear case has a similar basis to the bull case; it just sees the whirlwind of activity differently. Bulls see the promise of SRNE stock residing in its many opportunities. Bears (or just skeptics) see those opportunities as actually part of the problem. The company is doing too much to do any one thing well. And the constant activity serves in part to hide the fact that the opportunities simply may not be what management claims.
And after the past few weeks, I’m somewhat sympathetic to the bears. It’s hard to see how the company can successfully juggle this many balls without the resources (and employees) of a far larger, more diversified, company. It’s hard to see why ACEA is selling itself for $38 million if abivertinib has a real shot at being a blockbuster treatment. Sorrento has issued 42 press releases this year, yet chose not to highlight such a bargain purchase.
That’s not to say the bull case is wrong. It is absolutely not to say that SRNE stock is a short. It’s simply to say that a little common sense is in order. There’s a lot going on Sorrento, and it may be that there’s simply too much going on.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.