Sorrento Therapeutics (NASDAQ:SRNE) was the subject of an impressive jump in late-November, with shares almost doubling over the weekend between Nov. 22 and Nov. 24. The trigger for this sudden surge came when Sorrento announced it received two unexpected all-cash buyout offers from different companies over the weekend, with Sorrento choosing to reject them both.
Both of the offers in question valued Sorrento at a significant premium. The first offer at $3 per share would mean an 88% premium on Sorrento's closing price on Nov. 22, while the other offer, at $5 per share, comes out to a massive 213% premium. Although the names of these companies weren't disclosed, the news was more than enough to send the stock surging. However, analysts covering the stock seem to think that these offers are far too cheap, with one major analyst suggesting that the company is worth a 670% premium at least. Overall, the average price target of all analysts on Wall Street actively covering the stock suggests Sorrento is worth a whopping 827% premium.
What's Wall Street thinking?
That's not always the easiest question to ask, but there's some sound reasoning behind Wall Street's aggressive appraisal. Only two analysts cover Sorrento Therapeutics, but both have buy ratings on the stock. What's even more noticeable, however, is that the average target price between the two comes in at $24.50 per share, or an astounding 827% premium from Sorrento's prices following its major surge on Nov. 25..
One of these analysts, Donald Ellis from JMP Securities, cited the company's strong pipeline and impending milestones for the upcoming months as his main reason for his price target. Ellis first started covering Sorrento in October with a price target of $21, meaning that at the time, he suggested an 1,179% upside for the stock.
Multiple clinical trial announcements are expected to come out in December as well as Q1 2020. Specifically, Ellis singled out upcoming phase 1 trial results for Sorrento's pain drug RTX as well as phase 1 results for the company's top immuno-oncology drug, CD38, both of which he considers to be promising catalysts for the stock.
Sorrento's most promising drugs are split across the areas of immuno-oncology and nonopioid pain management. In regard to the former, Sorrento's key drugs include CD38, which is treating patients with multiple myeloma, and Seprehvir, which targets solid tumors in cancer patients. CD38 is still at the early phase 1 stage, while Sorrento's other cancer tumor drugs are at the phase 2 stage.
In terms of nonopioid pain-management drugs, ZTlido has passed phase 3 trials, and Sorrento is seeking a New Drug Application (NDA) for its use in treating pain related to postherpetic neuralgia, a common complication arising from shingles. Its other promising pain drug is RTX, which is undergoing multiple phase 1 and phase 2 trials for use in treating terminal cancer pain as well as osteoarthritis pain.
What many investors might not know, however, is that Sorrento also has a promising drug in the animal health market. Neuroclastin is a drug that's undergoing a phase 2 and a phase 3 trial for pain related to osteoarthritis and bone cancer in dogs.
Are these price targets justified?
It's hard to accurately price an early stage biotech company, especially one such as Sorrento that has so many drug candidates at early stages of clinical testing. However, what's known for certain is that Sorrento's board felt that the company was worth more than the 213% premium created by the $5-per-share offer it rejected.
Sorrento is in discussions with a number of different healthcare companies about potentially licensing its immuno-oncology drug candidates. As such, it's likely that the board has a better picture of just how much the company is worth should one of these licensing deals come through.
As for whether Sorrento has an 827% potential upside, that's even harder to evaluate. Perhaps if the company continues to report positive clinical results over the upcoming quarters and receives an updated offer, shares could come close to the $20ish per-share figure quoted by analysts. However, Sorrento specifically warned in its press release that investors shouldn't bank on the hopes of future offers and that "there is no guarantee or certainty the Company will complete any pending licensing or collaboration transactions."
Watch out for the financials
Even with early-stage biotech stocks like Sorrento, investors still need to keep an eye on its financial figures, even if they are a secondary consideration in comparison to its drug candidates. In this regard, Sorrento has been hemorrhaging cash at a rather alarming rate. Revenues for the recent quarter ending on Sept. 30 came in at $5.8 million, while net losses were $64.4 million.
Cash and cash equivalents came in at just $34.6 million for the quarter, in comparison to the $158 million held by the company in Q4 2018. This is pretty bad for a biotech stock, as it's burning through a remarkable amount of cash in a short period of time. Over the past nine months, Sorrento reported $293.6 million net losses, a remarkably high figure considering that the company's entire market value is just $419.9 million.
What should investors think?
Sorrento without a doubt seems like a likely acquisition target, and this seems to be the main driving force behind the stock right now. The company definitely has a promising drug portfolio, but the majority of the medications are still quite early in clinical trials, either at stage 1 or stage 2. When coupled with the fact that the company is burning through cash at a fast rate, even by biotech standards, Sorrento needs to either raise more cash or hurry up and find a prospective buyer soon.
However, while Wall Street's 827% premium seems like overkill, it wouldn't be surprising if another company made an offer that put Sorrento at a 300% or 400% premium. So investors shouldn't be shocked if Sorrento Therapeutics ends up making another major jump in the upcoming weeks and months, albeit not to the same lofty extent expected by the two Wall Street analysts covering the stock.