You know a company has some really good news when its stock skyrockets 144% in a single day. That's exactly what Sorrento Therapeutics (SRNE.Q 33.33%) shares did on Friday. And it looked like the biotech's momentum would keep going on Monday, with Sorrento soaring more than 40% early before giving up its additional gains.
Sorrento indeed had some really good news. The company announced Friday morning that its experimental antibody STI-1499 was able to completely inhibit infection by the novel coronavirus in a preclinical test. With this promising news, is Sorrento Therapeutics stock a buy?
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Just how good is Sorrento's news?
To be sure, Sorrento's preclinical data is encouraging. The company said that it screened billions of different antibodies to identify the most promising candidates for defending against infection by the novel coronavirus. STI-1499 stood out as the best of the bunch at neutralizing the virus that causes COVID-19.
Also, Sorrento's previously announced approach of developing an antibody cocktail seems like a smart strategy. The company expects that STI-1499 will be the first antibody in its experimental cocktail.
Investors and the public in general rightfully cheered Sorrento's update. Before we let the cart get ahead of the horse, though, it's important to note that tests conducted in test tubes and petri dishes in a lab don't always translate to success in human clinical testing. And Sorrento's announcement late last week pertained only to results from a lab test.
Sorrento must first advance its STI-1499 into an early stage clinical study. Success is far from a slam dunk even after that point. Fewer than one out of five experimental drugs targeting infectious diseases that make it to a phase 1 clinical trial go on to win FDA approval, according to historical data compiled by biopharmaceutical industry trade organization BIO.
The rest of the story
Sorrento currently has one approved product, ZTlido, which was launched commercially in October 2018 as a treatment for pain associated with shingles. ZTlido is a topical delivery for lidocaine, a local anesthetic that's been around for more than 70 years. Outside of ZTlido, Sorrento hasn't completed any clinical trials thus far.
ZTlido hasn't been a huge moneymaker. Sorrento's product revenue totaled only $5.2 million in the first quarter. Even with service revenue of nearly $2.5 million added to its revenue total, the company is spending a lot more than it's making. Sorrento posted a net loss of $69.2 million in Q1. Even worse, it doesn't have a lot of cash remaining to fund operations. The drugmaker ended the first quarter with cash and cash equivalents totaling $21.9 million.
Without raising additional capital, the company won't be able to keep the lights on much less fund clinical studies for its coronavirus program. In March, Sorrento filed a shelf registration statement with the Securities and Exchange Commission that paves the way for offering up to $1 billion in securities, including issuing new shares. It's a virtual certainty that a stock offering is on the way in the near future. That means the value of existing shares will be diluted.
In the meantime, Sorrento said that it's trying to obtain government support as well as potentially line up pharmaceutical partners to scale up its manufacturing capacity for STI-1499. This financial assistance would be a must for the company to deliver on its ambitious goal of producing millions of doses of the antibody.
Answering the question
So is Sorrento Therapeutics stock a buy right now? If the company is successful with its experimental COVID-19 drug, the stock will launch into orbit. But despite the promising preclinical results, there's still a long way to go and a lot of hurdles to be jumped.
If STI-1499 doesn't pan out in clinical trials, all of Sorrento's recent gains will evaporate. Investors should ask themselves if they're willing to take the risk of losing half of their money or even more in exchange for the possibility of making several times their initial investment. My answer to this question is a resounding "no." I think that there are too many uncertainties for Sorrento to be a compelling stock to buy at this point.
I'd prefer to see how STI-1499 fares in at least two phases of clinical studies. These studies will shed light on how safe and effective the antibody truly is. For now, I think that there are other biotech stocks, including some with promising COVID-19 programs, that offer more attractive risk-reward propositions.
