What happened

Shares of the commercial-stage biopharma Sorrento Therapeutics (SRNE.Q -13.51%) are having a tough time today. Specifically, the drugmaker's stock is down by a hefty 56.3% as of 11:22 a.m. Monday morning. 

What's sparking this dramatic sell-off? Ahead of the opening bell, Sorrento released an 8-K filing with the U.S. Securities and Exchange Commission revealing the company, and its wholly owned direct subsidiary Scintilla Pharmaceuticals ("the debtors"), have voluntarily commenced a Chapter 11 bankruptcy proceeding in the U.S. Bankruptcy Court for the Southern District of Texas. 

So what

This Chapter 11 bankruptcy move appears to be linked to the company's ongoing litigation against billionaire biotech investor Dr. Patrick Soon-Shiong and entities he controls. This litigation centers around a 2015 joint venture known as NANTibody.

Last December, an arbitrator issued an award granting contractual damages and pre-award interest in the amount of $156,829,562 to the Soon-Shiong-led immuno-oncology company NantCell, a subsidiary of ImmunityBio. Additionally, the court awarded NANTibody $16,681,521.

On Feb. 7, 2023, the court confirmed the judgment, putting the debtors at risk of asset seizure. This bankruptcy filing should halt any potential asset seizures and allow the companies to continue their ordinary course of operations as the case works it way through the courts.  

Now what

Is Sorrento's stock a bad-news buy? On one hand, Wall Street analysts covering the stock do seem to think the biotech's clinical pipeline is being grossly undervalued by the market right now. That being said, bankruptcy proceedings are inherently unpredictable.

Now, Sorrento may ultimately emerge from this reorganization in a better financial position than it was prior to this award. But this "best-case scenario" is far from guaranteed. So, until this key headwind is out of the picture, investors may want to watch this story unfold from the safety of the sidelines.