Sorrento Therapeutics (NASDAQ:SRNE) is a clinical stage biopharmaceutical company focused on the development of novel treatments for cancer and cancer-associated pain. Cynviloq is Sorrento's lead drug candidate, a direct competitor to Celgene's Abraxane®, has advanced into a pivotal Phase III trial using 505(b) (2) pathway. The Company is also pursuing resiniferatoxin (RTX) for the treatment of cancer-associated pain as well as G-MAB therapeutic antibodies (PD-1, PD-L1, etc.) for the treatment of cancer. Recently, Sorrento announced two strategic partnerships with Conkwest, Inc. and NantWorks to advance its immunotherapy pipeline. These partnerships, described below, not only boost the Company's balance sheet, but also validate its novel technology.
Joint development of Sorrento's G-MAB® antibodies and Conkwest's CAR-TNKTM immunotherapy
On December 19th, Sorrento and privately held Conkwest, announced the establishment of a partnership to jointly develop the combination of Sorrento's G-MAB® antibodies with Conkwest's proprietary Neukoplast cell line. The platform will be called CAR-TNK™ (pronounced as "Car-Tank") and will focus on the treatment of hematological and solid tumors. Neukoplast is a Natural Killer (NASDAQ:NK) cell-based therapy similar to adoptive immune therapy in which a patient's own cells are manipulated, cultivated outside the body and then reintroduced in the patient to treat cancers such as B-cell malignancies and acute lymphoblastic leukemia (NYSE:ALL). This therapy has been regarded as one of the most compelling breakthroughs in cancer treatment in recent years resulting in a high percentage of complete responses in leukemia patients. However, pitfalls of this approach include side effects due to excessive cytokine release resulting in detrimental reactions often requiring treatment in the intensive care unit. Furthermore, this approach utilizes patient's own cells which pose difficulty in obtaining adequate numbers, but also require extensive incubation periods and manipulation outside the body.
Conkwest's NK therapy, currently in Phase I trials, differs for traditional adoptive therapy as it is a proprietary NK cell line that can be rapidly grown into large quantities and stored for immediate or later use. In addition, cells do not need to be customized for each individual patient and also lack cytokine expression which helps diminish the chances of abnormal cytokine release. Sorrento's technology comes into play as Neukoplast can be re-engineered to express receptors that can recognize specific tumor antigen targets including but not limited to PD-1, PD-L1, and CTLA-4. The two entities hope that these re-engineered cells will result in a greater therapeutic response rather than either technology alone.
Under the terms of the collaboration, the two companies will accelerate the development of CAR-TNKs. Sorrento and Conkwest will share R&D expenses as well as any revenues as a result of the partnership. Sorrento will invest $9 million in Conkwest as well as $2 million in cash for the development of the CAR-TNK cell platform.
NantWorks provides $20 million in funding to develop Sorrento's PD-1, PD-L1 and CTLA-4 antibodies.
Sorrento and NantWorks founder, Dr. Patrick Soon Shiong, announced on December 15th the establishment of a joint venture to develop Sorrento's antibody therapeutics program for the treatment of cancer and autoimmune diseases. The joint venture will be an independent biotechnology entity with $20 million in mutual funding. NantWorks will acquire a 19.9% equity stake in Sorrento by acquiring shares priced at $5.80 as well as granting warrants to purchase up to 1,724,138 shares at an excise price of $5.80 per share for 3 years.
The focus of the new venture will be to spur the development of Sorrento's monoclonal antibodies which include PDL-1, PD-L1, CTLA-4 antibody drug conjugates as well as other potential targets. We believe that the majority of the $20 million in funding will be provided by NantWorks while Sorrento will supply antibodies as well as some additional funding.
Collaborations Key to Accelerating Sorrento's Promising Pipeline
These two recent collaborations with Conkwest and NantWorks are positive developments for the company in several ways:
- The NantWorks deal increases Sorrento's balance sheet to over $40 million with the potential of another $10 million if the warrants are excised leaving the company with a cash runway throughout 2016. NantWorks and Conkwest agreements help validate the Company's technology as it has one of the most diverse human antibody libraries in the current market. The combination of Conkwest's novel Neukoplast, currently in clinical trials, combined with Sorrento's G-MAB antibodies has huge market potential.
- This is the Company's fourth strategic partnership announced in 2014 thus showing the management's aggressive pursuit of non-dilutive funding and collaboration. Additionally, Sorrento has secured two grants with the National Institutes of Health (NIH) exceeding $2.6 million.
- The joint venture between Sorrento and NantWorks has the potential to not only spawn ventures, but also IPO with the technology in different therapeutics areas.
We Raise Our Target Price to $18.00
Thus far, Sorrento is beginning to show that it has the potential to become a highly successful biotechnology company. We maintain our Outperform rating as well as raise our 12-month price target to $18.00 per share from our previous target of $15.00. This is mainly due to the favorable agreements with NantWorks and Conkwest. These agreements encompass therapeutic antibodies which represent one of the largest markets with the potential of multibillion dollar sales. The partnerships accelerate the development of the Company's pipeline programs which could help generate near-term revenues.
In addition to these new partnerships, the Company's lead candidate, Cynviloq, has advanced into a pivotal Phase III clinical trial via the 505(b) (2) regulatory pathway. This pathway will dramatically shorten the development time of Cynviloq while reducing development risks. We estimate that Cynviloq could be approved for the treatment of non-small cell lung and metastatic breast cancers and enter a billion dollar market in 2016 pending trial success.
The company's second lead clinical program, resiniferatoxin (RTX), targets cancer-associated pain-an enormous market. RTX has a unique mechanism of action and the potential to command a large stake of the cancer-associated pain market if approved. The drug is currently in an investigator-sponsored Phase I/II clinical trial and the Company plans to initiate additional Phase I/II clinical trials in 2015. The Company recently formed a subsidiary, Ark Animal Therapeutics, aimed at expanding the use of RTX in animal health.
Sorrento's current share price of $8.40 values the company at $243 million based on 29 million outstanding shares. According to our model, Sorrento could become profitable in 2018 with an EPS of $1.26 based on $176.8 million in total revenue. We believe the Company should be valued with the biotech industry average P/E multiple of 35X. A 2018 EPS of $1.26 would yield a price of approximately $15.00 per share at a 30% discount rate. With recent agreements among Conkwest and NantWorks, we believe a price target increase of $3.00 is warranted yielding $18.00 per share. This values Sorrento with a conservative $522 million market cap. These predictions assume the Company succeeds in its clinical trials and passes all the regulatory hurdles to gain approval of its pipeline. Failure to gain approval of their pipeline would be a substantial loss and setback for the company. However, if the Company succeeds, it could yield substantial revenues and skyrocket in value. Thus, we believe it is undervalued compared to its peers and may be a good long-term investment in the biotechnology arena.
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