Year to date, shares of Sorrento Therapeutics (SRNE) have been crushing their peers in the biotech sector, largely thanks to the expansion of the company's coronavirus testing and treatment pipeline. In the span of six months, the company's stock has returned more than 327%, whereas the iShares Nasdaq Biotech ETF (IBB 1.31%) is up just less than 11%. An investment of $10,000 at the beginning of the year would have been worth $42,750 as of market close on Aug. 11. Given its current rate of compounding, investors may be wondering if Sorrento is one of the top growth stocks to buy now.
While the company has had its fair share of controversy, it also has a robust pipeline that can enrich investors. Just how much faith should investors put toward its science?
A war against the coronavirus
Sorrento is doing it all, developing antibody treatments, diagnostic tests, and vaccine candidates in the fight against COVID-19. The company has a well-rounded portfolio, including its most promising product, COVI-SHIELD, an antibody cocktail that is currently being tested for the treatment of COVID-19.
As of now, COVI-SHIELD is undergoing preclinical testing by Sorrento and its partner, Mount Sinai Hospital. If the tests are successful, the company anticipates it will have the capacity to manufacture 200,000 courses of the biologic per month, with the ability to expand to tens of millions of courses based on demand.
Like COVI-SHIELD, the company's COVID-19 vaccine candidate and other antibody treatment candidates have yet to reach the human testing phase. So far, Sorrento has an Emergency Use Authorization (EUA) under review for its COVID-19 antibody test by the U.S. Food and Drug Administration (FDA). An antibody test allows healthcare professionals to identify patients who were previously infected with the coronavirus to monitor herd immunity.
More recently, Sorrento received a license from Columbia University to commercialize COVI-TRACE. This saliva test can determine whether a person has COVID-19 in as little as 30 minutes. There are many perks to this test, including the potential for at-home use. The company is seeking an EUA for the test.
Whether COVI-TRACE will turn a profit, however, is up for debate. After the release announcing COVI-TRACE, famous short-seller Hindenburg Research claimed that Columbia University had received as little as $5 million (plus royalties) from Sorrento in the deal, and said it does not expect COVI-TRACE to generate any profit. If that's true, Sorrento may have a severe financial problem.
How do the financials look?
Sorrento's financial situation is also a bit difficult to grasp. As of June 30, the company had about $24.3 million in cash, $45 million in restricted cash, and $257 million in various types of investments, for a total of $326 million in total liquidity. Meanwhile, the company has close to $19.2 million in current debt, $147 million in long-term debt, $42 million it owes from debt financing, and $55 million in operating lease liabilities, for a total of $263 million in debt and lease obligations. These numbers are good news, as they show that the company can manage its financial responsibilities in the short run.
Adjustments are required when considering the company's net losses, as well. In the first half of 2020, Sorrento recorded about $154.2 million in net losses. Fortunately, a large portion of this loss was because of the $52 million the company paid in premiums to extinguish a portion of its debt early. If we subtract this amount, along with other items, the company's cash loss from operations amounts to just $76 million in six months.
Further complicating the matter is that the company's chairman, CEO, and president, Dr. Henry Ji, recently received a 10-year performance award authorized by Sorrento's board of directors. The award links its potential payout to the company's market cap and would allow Ji to purchase up to 24.9 million shares of Sorrento at $17.30, should the share price remain above that threshold for at least six months. If this award is fully exercised, investors would need to brace themselves for dilution as high as 10%.
What's the verdict?
Although the company's clinical programs are, on average, at an early stage and Sorrento may need to raise cash to offset its net losses, there is one area in which Sorrento beats other coronavirus stocks -- its market cap. Currently, the company is worth about $3 billion, while other biotechs that are investigating COVID-19 vaccines -- such as Novavax (NVAX 0.58%), BioNTech (BNTX 5.64%), and Moderna (MRNA 3.18%) -- are worth anywhere between $7 billion and $28 billion.
Keep in mind that Sorrento has yet to receive any significant grant funding or orders for its COVID-19 antibody cocktails. If the company were to receive such awards -- say, from the Department of Defense -- its valuation would likely skyrocket. That said, there is risk inherent in the possibility that it will not secure such recognition.
Overall, just because the company's clinical programs are in their early stages does not mean they cannot eventually succeed. Take the case of Inovio Pharmaceuticals (INO 0.55%), which reported 100% immune response in its experimental COVID-19 vaccine in preclinical studies, and replicated such results when the vaccine candidate was given to human volunteers in phase 1 testing. While Sorrento certainly isn't the top growth stock to buy now, I think investors should give the company a chance in the event its antibody cocktails are proven effective at treating and preventing COVID-19.