Sorrento Therapeutics (SRNE -3.06%) is one of this year's rollercoaster stocks, riding the market crash and the coronavirus product hype train to grow by more than 450% before collapsing to its present level, 130% above its price on Jan. 1. Sorrento's stock is extremely headline-driven, making it risky to hold. But underneath its swinging price, there lies a biotech company working on promising and in-demand medicines that could address some of most serious health problems posed by the COVID-19 pandemic.
As many investors have identified, Sorrento's pipeline could be filled with treasures, and its stock has managed to grow despite occasional harsh falls. On the other hand, the company's financials are in terrible condition -- it may be at risk for bankruptcy sometime in the next couple of years. So is Sorrento a high-risk, high-reward stock for investors with nerves of steel, or is it a ticking time bomb that could detonate at any time? There's a solid case for both of these perspectives.
Sorrento is hoping to dominate the coronavirus testing and treatment markets
The case in favor of buying and holding Sorrento rests solely on the treatment candidates in its pipeline. Sorrento has eight different pipeline programs targeting COVID-19, including two coronavirus tests, three antibody-based treatments for acute infections, a vaccine candidate, and one immunomodulating drug for severe cases. While its tests are currently awaiting regulatory approval for sale and its immunomodulator is in phase 2 clinical trials, Sorrento's other programs are only in preclinical development or early clinical trials.
This means that the company has few short-term money-making prospects in its coronavirus pipeline, and it will need a significant amount of time and cash to develop its projects further. Nonetheless, investors should realize that Sorrento's COVID-19 pipeline could turn the company into a dominating competitor within the coronavirus market, as the company may eventually provide a suite of prophylactics, tests, and therapeutics that cater to every phase of the disease's progression. An infected patient might be tested with one of the company's diagnostics, receive treatment with its early intervention cocktail, and then receive a more potent medicine if their condition worsens. Finally, the patient could be vaccinated with Sorrento's product so that they avoid coronavirus infection the next time around. In sum, Sorrento could capture huge value per coronavirus patient.
Coronavirus programs aside, Sorrento has a handful of other projects that consist of immunotherapies and analgesics, many of which are in phase 2 clinical trials. The most advanced program is its therapy ABIVERTINIB, which is being tested in a phase 3 clinical trial to treat non-small-cell lung cancer (NSCLC). In early studies, ABIVERTINIB showed tolerability, safety, and efficacy among about 600 participants. The drug candidate is also being tested as a potential treatment for cytokine storms associated with COVID-19, and is probably Sorrento's best hope for generating recurring revenue at a significant scale in the near future. The addressable market is significant -- over 200,000 people are diagnosed with NSCLC in the U.S. alone each year. In the meantime, however, the stock market is fixated on announcements regarding Sorrento's COVID-19 programs, so new investors should proceed with caution before jumping to scoop up the stock.
How much time does Sorrento have left?
Despite its promising pipeline, Sorrento is still a ticking time bomb. In terms of its current revenue, Sorrento only has one FDA-approved drug on the market: a topical lidocaine gel called ZTLido. Between sales of ZTLido and collaborations with other companies, Sorrento has reported annual trailing revenues of $35.54 million.
That isn't nearly enough to make the company profitable, nor is it enough to address the company's $220.8 million in total debt or its $207.2 million in trailing operating expenses. Plus, its cash holdings of $24.4 million in the most recent quarter are not enough to keep pushing its most promising pipeline projects forward. To address its cash shortfall of $162.9 million in the last 12 months, Sorrento has issued $196.9 million in new stock, diluting shareholders in the process.
Investors are correct to question Sorrento's ability to remain solvent. While the company only has $22.6 million in current debt and capital expenses due in the next 12 months, it's also carrying more than $91 million in payables and accrued expenses that are due in the short term. In a recent 10-Q filing with the Securities and Exchange Commission (SEC), Sorrento emphasized its precarious position and that it expects more short term losses. Leadership admitted that Sorrento "will require substantial additional funding, which may not be available to us on acceptable terms, or at all." What's more, Sorrento claimed that it will need to significantly increase its research and development (R&D) spending before it can entertain the possibility of making money from drug sales. As we understand the company's dire financial situation, it becomes clearer and clearer that the biotech's shareholders should consider running for the hills.