What happened

Shares of Sorrento Therapeutics (NASDAQ:SRNE) dropped nearly 21% last month, according to data provided by S&P Global Market Intelligence. The stock's September slide was triggered by an announcement that the company's majority-owned subsidiary Scilex entered into a debt-financing deal that would provide $140 million.

While that cash inflow will be needed to hit the ground running when marketing the duo's first commercial product, there's a catch: The debt will be repaid using royalties on product sales. That will limit the financial benefit captured by Sorrento Therapeutics as it transitions to commercial operations, which had investors and analysts second-guessing the company's $600 million valuation at the time of the announcement.

A stock chart showing losses on a touchscreen.

Image source: Getty Images.

So what

Sorrento Therapeutics stock has gained about 37% since the beginning of the year, thanks in large part to the excitement surrounding the launch of its first product ZTlido, which is a patch approved to treat post-shingles pain. Due to ZTlido's ability to be worn for 12 hours and even during exercise, the company has high hopes for the product to capture market share from existing lidocaine-administering patches. But it's not exactly a slam-dunk.

The excitement for approval was somewhat tempered by concerns that the company's marketing inexperience could delay a sales ramp up or limit market penetration, in addition to the name recognition of the market's leading patch, Lidoderm (and a healthy amount of generic patches). Now, on top of that fairly standard uncertainty for a newly commercial company, analysts are concerned that the new debt financing will keep shareholders from fully benefiting from a successful launch.

Now what

Worries over the details of the recent debt financing, in which the company will need to repay the loan using proceeds from the sale of its first commercial product, should not be overlooked. That's especially true considering Sorrento Therapeutics posted an operating loss of nearly $61 million in the first half of 2018. If ZTlido stumbles out of the gate or doesn't sell well enough to meet debt-payment obligations, then shareholders could be significantly harmed.

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