Initiation: March 27, 2018
J Capital Research ("J Cap") is an investment advisor to private funds. J Cap has analyzed the U.S.-listed company Sorrento Therapeutics (“SRNE”) and is hereby publishing the outcome and the conclusions of our analysis, based on publicly available information. Some of our clients may be short shares of SRNE, and, for this reason, there might be a conflict of interest.
Management seems to have given away Cynviloq (a generic Abraxane candidate), the only promising drug the company ever looked like it might commercialize, for a pittance. Sorrento not only sold the drug to its chief competitor but then turned around and gave the cash payment back to that competitor and, seven months later, BOUGHT back 40% of the drug! We calculate that Sorrento actually paid the Nant network of biotech companies about $6 mln in the complicated set of transactions.
Sorrento’s dilutive financing deals benefit a select group of investors close to the CEO. An investor group in 2016 took the company to court for dubious dilutive deals, and management had to give back options. But the company is continuing this pattern. It has just registered 34.2 mln shares and warrants for sale in two separate S-3’s filled on March 22, and we think management and financing partners will soon be dumping shares that could be as much as 39% of the company’s shares outstanding as of December 31. The HK/China-based investors close to the CEO will be able to realize gains of >300% in three months.
We have identified a pattern of circular transactions and capital-intensive joint ventures that never show results. Many joint ventures have no clear purpose and have created no advancement in product development to date. JVs with the Nant network of biotech companies to which Sorrento contributed $60 mln and circular transactions with HK-based biotechnology companies are examples of such dubious spending.
Sorrento announced a $120.5 mln convertible note this morning, ensuring at least an additional 20% dilution to shareholders who have already experienced >40% dilution in the last 6 months. Given the company’s track record of cash incineration and lack of focus with regard to drug development, we doubt this will be more than a stop gap and may even limit the company’s available options for fundraising further funding down the line.
We suspect that finance managers may have disagreements with the company, as the company has lost a large number of CFOs, accounting directors, and audit committee heads, and Deloitte was replaced as auditor in March after only two years by relatively low-ranked Mayer Hoffman McCann.
Sorrento does not have a single product on the market despite $168 mln spent on acquisitions and $170 mln on R&D through 2017. Yet the company still won’t rule out future acquisitions, and SRNE is still continuing to raise and squander money, over the vociferous objections of scientists who have associated themselves with the company. Sorrento has just one product, ZTlido, which received FDA approval a month ago. But management calls it “non-core,” and last week’s registration of shares in Scilex--the company responsible for ZTlido—may suggest that the Scilex founders have little confidence in the product.
Management has a history of making highly promotional claims about its pipeline of drugs, calling its CD38 CAR-T, for example, “the most advanced” in development. This is clearly untrue. Sorrento has fallen far behind companies like Celgene in innovativeness and in progress toward commercialization.
We are aware of one incident where SRNE executives asked Bioserv (a subsidiary) to disregard human safety and ship a contaminated product. Two former employees provided us with a detailed account of an incident in April 2017 when a senior member of management directed staff at the Bioserv subsidiary to ship an injectable drug even though the company knew it was contaminated with glass. Two executives quit in protest over the incident and at least one more was fired, apparently for resisting management’s pressure to ship. Fortunately, the company did not ship the contaminated medicine.
We believe Sorrento is a zero. Even if you think that Sorrento’s antibody library and other assets have scientific merit, each requires tens of millions of dollars and, more importantly, clear strategic focus to commercialize. Given the perilous condition the company finds itself in financially, it is hard to understand why any potential acquirer would pay more than fire-sale prices.
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