Seeking Alpha
Special situations, micro-cap, biotech, healthcare
Profile| Send Message|
( followers)  

Recently, Sorrento Therapeutics (SRNED.OB) announced great news from the end-of-Phase II meeting with the FDA regarding the Cynviloq™ (IG-001; paclitaxel polymeric micelle for Injectable Suspension) development program. Cynviloq is a mid-stage metastatic breast cancer (MBC) and non-small cell lung cancer (NSCLC) drug that was just deemed appropriate for a 525(b)(2) submission.

This type of submission, as defined by the FDA's own documents, is described as:

"(2) an application that contains full reports of investigations of safety and effectiveness but where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference (section 505(b)(2))" (link)

This basically means that Cynviloq's eventual NDA submission can be built on the clinical data that has been obtained and previously analyzed by companies developing Abraxane and Taxol - two formulations of the mitotic inhibitor "paclitaxel". Abraxane binds paclitaxel to the protein albumin, while Cynviloq is a lipid formulation of paclitaxel. Through interference with the process of mitosis (cell division), these formulations of paclitaxel aim to damage cancer cells and to prevent their proliferation.

The commercial potential for Cynviloq is derived from the previous - and ongoing - success of its cousin Abraxane, which was originally developed by Abraxis BioScience as an improvement to the original Taxol. Abraxis was acquired by Celgene (CELG) in June 2010 for $3.5 B, but primarily for the Abraxane asset.

This same asset generated $427 M in total 2012 sales. Most of this was derived from breast cancer, although growth is occurring in gastric cancer and non-small cell lung cancer. These are expected to balloon to over $1 B as the drug is approved for new cancer indications in the coming years - specifically malignant melanoma, bladder cancer, and ovarian cancer.

Although Cynviloq has only demonstrated statistically superior results against the original paclitaxel formulation - Taxol, the data produced thus far has been comparable to that of Abraxane. Since the FDA has acknowledged the 505(b)(2) approval pathway, Cynviloq only needs to prove that it is interchangeable with Abraxane as a therapy.

Since it will not have to prove its superiority here, a significant amount of development risk is taken off the table. Having said this, investors should note that Cynviloq does not have an easily identifiable competitive edge over Abraxane. Abraxane also has much more clinical data, including combination studies.

But despite its uphill battle against Abraxane, Sorrento remains quite inexpensive given its current position. Correcting for a recent reverse split, the market cap sits at ~$88 M - roughly 1/40th of the buyout price for Abraxis. Given that Cynviloq could achieve 5% of Abraxane's peak sales estimates, we could see a realistic 400-500% jump in Sorrento's valuation after 2016 (the year Cyvilog is now expected to launch).

Although the rights to Cynviloq belong to a private company known as IGDRASOL, Sorrento gained the option to acquire the drug in an agreement signed in March 2013 (link). Although there are other development programs, newer investors seem quite focused on Cynvilog due to its similarity to Abraxane.

It's worth noting that billionaire biotech investor Dr. Phillip Frost took an interest in the company back in 2009 due to Sorrento's antibody assets. This would include Sorrento's G-MAB library, which is claimed by the company to be one of the largest human antibody libraries available for commercial use. His healthcare holdings company OPKO Health (OPK) is currently the largest shareholder, with 2.4 M shares (nearly 18% of the company) on top of the 148,380 shares Dr. Frost owns personally. The next largest shareholder is the Sorrento CEO Dr. Henri Ji, who holds 1.7 M shares - nearly 13% of shares outstanding.

While OPKO's stake in Sorrento is not a guarantee of any future partnerships or acquisitions, it does show that Dr. Frost saw commercial value in Sorrento's antibody library alone. It is also encouraging to see substantial inside ownership, which exposes company management to the same risks that stockholders take.

Sorrento is a long term trade - on the pipeline, and would be a poor choice for short to medium-term traders due to a lack of major catalysts and low liquidity. Patient investors who are willing to wait, realistically, until 2016 or later will be able to swing for the fences.

(Original Post)

Notes on Biotech Risk:

Investors should realize that biotechnology companies of this size experience particularly high volatility, are speculative, and do hold significant risk for loss of wealth. Sorrento does receive a grant from the government, although it is not large enough to offset the company's costs. The company's ~$9.6 M in cash may not bring the company to the US launch of Cynvilog without equity financing, which may induce drops in share price. Investors believe that the company's valuation will increase more than the rate at which the company will burn cash, which is why the high risks are taken.

Source: Sorrento Secures FDA Approval Pathway Through 505(B)(2)