Sorrento Receives FDA Approval For ZTlido Which Had A Long Road To Approval

Summary

• Sorrento Therapeutics receives FDA approval for ZTlido treating patients with post-herpetic neuralgia also known as post-shingles pain.
• ZTlido will compete with Endo Pharmaceuticals Lidoderm as soon as it hits the market.
• ZTlido provides an advantage over other patch treatments in that it has better adhesion properties.
• ZTlido is a non-opioid which makes it a good treatment option for these patients with post-shingles pain.
• Financials will need to be kept above $8 million in unrestricted U.S. cash at all times so the company maintains its loan agreement with Hercules.

Recently, Sorrento Therapeutics (SRNE) announced that it had received FDA Approval for its pain patch ZTlido. This patch was approved by the FDA for the relief of pain associated with post-herpetic neuralgia (PHN). Another way to think of this is as post-shingles pain. The stock has traded lower since then, but I believe it offers a great buying opportunity. The reason being is because this pain patch is expected to generate peak sales of over $1 billion. Therefore, there is plenty of room for share price appreciation. Especially, since its market cap only stands at $705 million.

FDA Approval

The FDA approval for ZTlido is a huge game changer for Sorrento Therapeutics. That's because it can now go after a large market. But besides that point, there is one substantial difference between it and many other pain treatments. That difference being that ZTlido is a non-opioid. One thing to note is that there are no opioid drugs approved by the FDA for PHN. However, opioid drugs are still used for PHN off-label as first-line treatment. This now provides a way for doctors to treat this indication through the use of a non-opioid which is safer for patients. The ZTildo patch is expected to compete with Endo Pharmaceuticals (OTCPK:ENDO) Lidoderm. With Endo already establishing such a foothold in this market, how is Sorrento going to compete? Well, I will tell you one way it won't compete it in and that is in terms of efficacy. Both ZTildo and Lidoderm perform pretty much in the same fashion. The difference, believe it or not, will come in terms of adhesion. Further research online shows that patients have trouble with the adhesion properties of Lidoderm. That means that the patch hardly stays on when a patient needs to use it. Well, ZTildo has better adhesion properties. I believe that because of this it will perform better as soon as it hits the market sometime in 2018.

Wise Acquisition

Sorrento Therapeutics didn't develop ZTlido. Instead, it had acquired another biotech company which had already developed it. Back in 2016, Sorrento agreed to pay $47.6 million to buy Scilex Pharmaceuticals. At least 80% wasn't to be paid until ZTlido was eventually approved by the FDA. That's because in 2015 Scilex attempted to gain FDA approval for ZTlido but the FDA rejected the NDA for the patch. Therefore, more work needed to be done. As soon as Sorrento finished the acquisition of Scilex Pharmaceuticals, they received proper guidance from the FDA so that they could resubmit the application. This was a good acquisition on Sorrento's part, because it will likely pay off by providing the company billions in revenue from ZTlido.

Financials

According to the 10-Q SEC filing, Sorrento Therapeutics has cash and cash equivalents of $38.3 million as of September 30, 2017. The company doesn't have a lot of cash on hand. It states in its SEC filing that it will likely need to keep funding its operations through equity sales or debt financing. Speaking of which, Sorrento had made an Loan Agreement with Herculues that it must maintain at least $8 million unrestricted U.S. cash at all times. That means to keep a good cushion of cash it is highly likely that Sorrento will be forced to raise some form of cash in the coming months. What could potentially be an option would be to find a commercialization partner for ZTlido. That may help bring in an upfront payment of cash and potential for a commercial partner to launch the product. That would save Sorrento from having to raise cash through debt or an offering.

Conclusion

Sorrento Therapeutics should do well as soon as ZTlido hits the market. A huge risk would be in terms of the company's financials. As noted above it needs to maintain a certain amount of unrestricted cash in order to not be in default of its loan agreement with Hercules. That means there is a likelihood that Sorrento may be forced to dilute shareholders to raise cash. Although, a better option would be if it can find a partner to front the bill for launching ZTlido. Another risk would be as soon as the patch hits the market. ZTlido may eventually be able to take a lot of market share away from Lidoderm, but it won't happen instantly. This will likely happen over a period of time. That means sales in the first few quarters may lag a bit. Other than that, I think that Sorrento Therapeutics is a good buying opportunity after its most recent FDA approval.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.