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Here's Why Sorrento Therapeutics Shares Jumped 13.3% in January

By Maxx Chatsko – Feb 7, 2020 at 6:59PM

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The pharmaceutical stock soared after being approached for an acquisition, but has tanked in the weeks since management announced it has declined the offer.

What happened

Shares of Sorrento Therapeutics (SRNE -3.11%) gained over 13% last month, according to data provided by S&P Global Market Intelligence. On Jan. 10, the company announced it had received a nonbinding proposal from a private equity firm to be acquired for $7 per share. The stock was trading for half that price prior to the announcement. 

Although shares raced higher on the news, they never topped $5 and the run-up was short-lived. Two weeks later, management announced that it had rejected the acquisition proposal because it "significantly undervalues the company." The pharma stock has cratered since then and has now delivered a year-to-date loss of 12%.

A steadily-ascending chart that shows a sudden decline.

Image source: Getty Images.

So what

Sorrento Therapeutics has three unique focus areas: immuno-oncology and cellular therapies, pain management, and animal health. It has one approved product on the market, the topical pain treatment ZTlido, but the drug generated revenue of only $11.8 million for the business in the first nine months of 2019. By comparison, the company reported an operating loss of $227 million in that span. 

Investors would have to admit that Sorrento has been pretty opportunistic in recent years. It's pivoted from various development focuses and latched on to buzzy areas such as cellular therapy. The latest example: The company announced the emergency development of a cellular therapy aimed at the 2019-nCoV coronavirus strain dominating the news. 

But investors would also have to admit that annual operating losses of over $200 million simply aren't sustainable. That explains why the stock didn't come close to the stated acquisition price of $7 per share -- and why it gave up the gains so quickly when the hope of an acquisition fell through.

Now what

It's possible that Sorrento Therapeutics can find success with its immuno-oncology pipeline, which is the one thing that could potentially earn it a little more recognition and respect among investors. Until then, mounting operating losses should give investors more than enough reason to avoid the pharma stock.

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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