Sorrento Therapeutics Bottoming At $5.00 To $6.00 Per Share And Offering Material Upside

| About: Sorrento Therapeutics, (SRNE)

Summary

Sorrento Therapeutics stock is down from a high of $24.30 down to the current price of $6.00.

The market cap of $225m is covered 50% by cash on hand and SRNE’s holding of NK.

Promising drug development pipeline offers significant upside in 2016 including $1.2BN in milestone payments from the sale of Cynviloq.

Additionally, the company benefits from its partnership with Dr. Patrick Soon-Shiong a billionaire doctor and biotech entrepreneur.

Finally, the technical picture indicates limited downside making SRNE my top biotech stock for 2016.

Business Description

Sorrento Therapeutics (NASDAQ:SRNE) is a development stage biopharmaceutical company engaged in the discovery, acquisition, development and commercialization of proprietary drug therapeutics.

Its primary focus is oncology, including the treatment of chronic cancer pain, but it's also developing therapeutic products for other indications, including immunology and infectious diseases.

About Dr. Patrick Soon-Shiong

To better understand SRNE's development pipeline and the investment thesis one must first understand who Dr. Patrick Soon-Shiong is including his prior success developing other U.S. medical and biotech companies. For further information on Dr. Patrick Soon-Shiong see here, here and here.

Dr. Patrick Soon-Shiong is the richest doctor in the world, a medical version of Elon Musk which has had considerable success both advancing medical science and as an entrepreneur. The table below gives an overview of the companies he has successfully founded and completely or partially exited, either via an IPO or a trade sale.

In total, Dr. Patrick Soon-Shiong has created nearly $8BN in shareholder value including $6BN for himself. His net worth is estimated at $12.2BN by Forbes making him #35 on the Forbes 400 list. Additionally, he is considered the richest man in Los Angeles.

The paths of Dr. Patrick Soon-Shiong and SRNE have been interlinked since December 14, 2015, when Dr. Patrick Soon-Shiong became the largest shareholder of SRNE with a 19.9% stake purchased at $5.80 per share. In addition, SRNE granted Dr. Patrick Soon-Shiong a 3 year warrant to purchase additional 1.7m shares of common stock at an exercise price of $5.80 per share. Currently, Dr. Patrick Soon-Shiong is the largest shareholder of SRNE with a 21.3% aggregate holding according to Bloomberg.

A 30 minute interview with Dr. Patrick Soon-Shiong with Larry King can be viewed by clicking here.

Financials

The table below includes a financial summary of SRNE. Its $225 market cap is roughly 50% covered by cash on hand ($59m and SRNE's stake in NK currently valued at $66m). The company has sufficient cash on hand to fund itself until end of 2016.

Development Drug Pipeline

SRNE has a clinical development pipeline with multiple potential drugs including JV's and partnerships. These include:

Cynviloq

SRNE had been developing a biosimilar drug to Celgene's Abraxane a second generation paclitaxel. Cynviloq is a so-called "third generation paclitaxel" formulation for the potential treatment of metastatic breast cancer, non-small cell lung cancer, pancreatic cancer and other solid tumors.

Abraxane was acquired by Celgene (NASDAQ:CELG) when it acquired Abraxis BioScience Inc for $2.9 billion in cash and stock on June 30, 2010. Abraxane had been founded by Dr. Patrick Soon-Shiong who had helped developed the drug formula and owned 80% of the equity at the time the transaction was announced.

A biosimilar (also known as follow on biologic or subsequent entry biologic) is a biologic medical product which is almost an identical copy of an original product that is manufactured by a different company. Biosimilars are officially approved versions of original "innovator" products, and can be manufactured and marketed once an exclusivity period for the original product has expired. Reference to the innovator product is an integral component of the approval process for a biosimilar.

In July 2013, the FDA Division of Oncology Products 1 agreed that the Cynviloq data available are sufficient to support a 505(b)(2) pathway, using Abraxane and Taxol as the Reference Listed Drugs, to obtain approval. SRNE initiated the single bioequivalence trial required for registration, on March 31, 2014.

SRNE has exclusive distribution rights to Cynviloqin in the U.S., the 27 countries of the EU, Mexico, Canada, and Australia which it acquired from Samyang Biopharmaceuticals, a South Korean company. Cynviloq is being marketed in Korea, Vietnam, the Philippines, India, and Thailand under the names of Paxus PM and Genexol PM.

On May 15, 2015 SRNE announced that NantPharma, founded by Dr. Patrick Soon-Shiong and a member of the NantWorks ecosystem of companies, agreed to acquire the rights to Cynviloq through the acquisition of IgDraSol, Inc., a wholly-owned subsidiary of SRNE.

Under the terms of the agreement, SRNE will receive more than $90m in an up-front cash payment (of which SRNE is obligated to use $80 million to fund the company's joint ventures) plus the potential of $620m in regulatory and $600m in sales milestone payments should certain events occur. SRNE will also receive additional transfer pricing payments from total unit sales and has the option to co-develop and or co-market Cynviloq on terms to be negotiated.

The Cynviloq transaction closed on July 8, 2015. In terms of market opportunity, Celgene forecasts albumin bound paclitaxel to achieve sales of $2.2BN by 2020 which would be split between generic drugs, Celgene's Abraxane and potentially Cynviloq if successfully approved.

Essentially, SRNE has sold Cynviloq for $90m plus milestone payments of $1.2BN. Additionally, SRNE will receive transfer pricing payments from total unit sales (royalties) plus it has the option to co-develop and co-market Cynviloq on terms to be negotiated.

This is a great deal for SRNE and a fantastic endorsement of Cynviloq. Dr. Patrick Soon-Shiong, the inventor of Abraxane and founder of the company that commercialized it, Abraxis, is essentially betting that Cynviloq will be Abraxane's successor drug after its exclusivity period expires. SRNE has significant near and long term upside from the deal without putting any further resources into the drug development. Just the association with Dr. Patrick Soon-Shiong is likely to create additional interest in Cynviloq and the rest of SRNE's drug development pipeline from major pharmaceutical companies.

Resiniferatoxin (RTX)

Resiniferatoxin, or RTX, is a non-opiate, ultra-potent and selective agonist of the TRPV-1 receptor for intractable pain in end-stage disease. RTX directly interacts with nerve cells expressing TRPV-1 receptors without affecting normal sensation (touch and vibration sense) or muscle function. RTX has been tested in animals and is currently being tested in an investigator-sponsored Phase I/II clinical trial at the National Institute of Health, or NIH under a Cooperative Research and Development Agreement.

According to the American Cancer Society, about 1.5m Americans are diagnosed with cancer and 600,000 die annually. About 80% of cancer patients suffer from moderate to severe pain prior to death for which they are prescribed morphine which can cost up to $5,000 per patient per 90 days. Using these figures I estimate the market opportunity to be approximately $2.4BN annually.

Unfortunately, the RTX study at the NIH has been placed on hold following an FDA inspection that various deficiencies Nonetheless SRNE plans to continue with its already planned corporate Investigational New Drug application (NYSE:IND) for RTX.

G-MAB fully human antibody library platform

SRNE has multiple wholly owned product candidates in preclinical development and a discovery effort advancing additional therapeutic mAb drug candidates, all derived from its G-MAB library. SRNE believes these product candidates, individually or as components of antibody drug conjugates (NYSE:ADC), have the potential to address major unmet medical needs. SRNE is further developing these products together with NantBioCell in their joint The Immunotherapy Antibody JV.

Joint Ventures and Collaborations

1. On July, 2015 SRNE announced that it had entered into joint venture with NantBioScience, Inc. (part of the Nant group of companies controlled by Dr. Patrick Soon-Shiong) develop first in class small molecules against targets that may address important drivers of cancer growth including cancer stem cells. ‎ The two JV partners have committed $100m to the JV of which 60% will be owned by NantBioScience and 40% owned by SRNE, and funded accordingly.

2. On December 19, 2014 SRNE and Conkwest, Inc., announced that the companies have entered into a definitive agreement to jointly develop next generation CAR-TNK immunotherapies for the treatment of cancer. Under the terms of the agreement, SRNE and Conkwest will establish an exclusive global strategic collaboration focused on accelerating the development of CAR-TNKs for the treatment of hematological malignancies as well as solid tumors. Both companies will jointly own and share development costs and revenues from any developed CAR-TNK products. On December 24, 2014 Conkwest Inc. announced that Dr. Patrick Soon-Shiong will invest $48m into the company and become co-chairman of the Conkwest Inc. board.

3. On December 15, 2015 SRNE announced that it has entered into a binding agreement with Dr. Patrick Soon-Shiong to jointly develop next generation immunotherapies for the treatment of cancer and auto-immune diseases. NantWorks, through its subsidiary NantBioCell, and SRNE intend to establish the first joint venture the Immunotherapy Antibody JV, as an independent biotechnology company with $20 million initial joint funding. The immuno-oncology field has emerged as the one of most exciting and fastest developing pharmaceutical market and a recent forecast by Citigroup predicts this market to become the biggest blockbuster drug class in history with potential sales of up to $35BN annually over the next 10 years.

Technical Analysis

From the attached daily chart we can see the SRNE has had a precipitous fall from $24.30 to its current price per share of approximately $6.00. Initially, the share price decline was sharp with only small and short corrections indicating significant selling pressure. Downward momentum indicated by RSI bottomed at the recent low of approximately $8.00 in October 2015 which then was followed by sideways trading.

This is typical of a wave 4 which often is often slow and range bound with the time elapsed often equaling the entire prior wave formation as is the case for SRNE.

Click to enlarge

If correct, that would indicate that one further fall is to be expected. Once wave 5 is complete at a new low a new bull market can and should resume.

Zooming in to the 1 hour chart below one can see wave 5 which has been in progress since the latter half of December 2015. Although not providing certainty the technical position with RSI divergence, a completed ABC corrective structure and a completed wave C in 5 waves indicates that potentially a bottom has been reached.

Click to enlarge

Risk Factors

  • Technical analysis is a study of charts and probable highs and lows and does not offer certain or guaranteed outcomes or results. The goal is to identify exit and entry points where the probability of a major low or high is above average.
  • Biotech investments are very volatile and the market value of SRNE could fall precipitously based on investor sentiment, future company or industry news or clinical results
  • Since SRNE is cash flow negative it is reliant on being able to successfully develop its drug pipeline or raise debt or equity to fund its ongoing operations. Failure to do so could lead to bankruptcy or liquidation.

For a full overview of the risk factors associated with SRNE please consult the company's latest SEC filings here.

Conclusion

In summary, SRNE is a biotech company with a diverse and promising drug development pipeline. Milestone payments totaling $1.2BN could start flowing as early as 2016. The technical outlook indicates that a bottom has been reached or is near. The upside, while difficult to quantify, could be material if SRNE is able to execute successfully on its drug development pipeline

Disclosure: I am/we are long SRNE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article presents the opinions of the author and does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Investors are recommended to independently complete their own due diligence and evaluate any investment independently as well as to seek the advice of a financial advisor. The appropriateness or legality of a particular investment will depend on an investor’s individual circumstances and investment objectives. The securities, instruments, or strategies discussed in this article may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. The article is not an offer to buy or sell or the solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy.