- Sorrento Therapeutics had a wild ride in trading last week. First rising sharply thanks to FDA approval before succumbing to profit taking.
- The stock is now below where two insiders just purchase more than $1.5 million in new shares.
- So is the sell-off a buying opportunity? We take a look at this biopharma concern below.
What do dogs do on their day off?; Can't lie around – that's their job!” ― George Carlin
Sorrento Therapeutics (SRNE) provided its shareholders with a roller coaster week. The stock initially soared as the company's ZTlido patch was approved by the FDA for treating patients with post-herpetic neuralgia pain.
As is want for these approvals, the initial rally in the stock eventually turned into a huge bout of profit taking to end the week. This is exactly why I sold covered calls on my position in Sorrento on the big rise triggered by the initial approval.
Note: I garnered $2.50 for the September $10 calls in what proved to be a great stroke of timing. Like in golf, sometimes it is better to be lucky than good as my late father would say.
Interestingly around the levels I was selling my covered calls, two insiders were stepping up to the plate with significant purchases earlier in the week. Two officers added just over 150,000 shares in total at a price of $9.95 a share. One of the buyers is listed as the Founder, Chairman and CEO of the company. The other is listed as the Exec. VP, Chief Admin. Officer & Chief Legal Officer.
It was the first insider purchase in the shares since last June. Those were made at under $2.00 a share (the stock has had a huge run up over the past six months).
So what might account for these insiders optimism. ZTlido will go head to head with Lidoderm from Endo Pharmaceuticals (OTCPK:ENDO). As noted in an article by another SA contributor this week, both are equal in efficacy. However, ZTlido does seem to have better adhesion traits which might make it a superior solution.
Ironically, the shares of Endo Pharmaceuticals fell on news of ZTlido's approval but recovered quickly to end the week basically flat. It should be noted that in its fourth quarter report that hit early this week, Endo's management stated that it had
recorded a total increase of approximately $200 million to its legal reserves relating to both LIDODERM® antitrust matters and Testosterone Replacement Therapy (NYSEMKT:TRT) product liability matters after determining that a loss is probable and reasonably estimable".
The analyst commentary around Sorrento is very sparse despite a market cap of approximately $600 million. Oppenheimer reiterated its Buy rating after ZTlido's approval while increasing its price target to $11 on SRNE. It was the first analyst commentary I can find on the name in some nine month. Oppenheimer's analyst had this to say about his positive view on Sorrento
On Wednesday, Sorrento’s subsidiary SCILEX Pharmaceuticals received FDA approval under a 505(B)(2) for ZTlido, a lidocaine adhesive patch intended for the treatment of shingles-related pain. The approval shows SCILEX’s persistence with regulators has paid off; in 2016, ZTlido received a complete response letter citing deficiencies in equivalency testing and CMC. We view ZTlido as a key pillar in Sorrento’s strategy of hedging high-risk early stage programs with lower-risk, cash generating franchises, and we believe the product could provide Sorrento with meaningful sales revenue (estimated peak US+EU ~$220M) to offset operational expenses. With US approval in hand, we expect similar approvals in EU territories could be achieved beginning in late 2018. We reiterate our Outperform rating and increase our PT to $11"
The company ended the third quarter with just under $40 million in cash and marketable securities on the books. Sorrento burned through approximately $45 million in cash in first nine months of the year. This would seem to make it likely the company does a capital raise in the near future.
Source: Company Website
As can been seen above, Sorrento has some earlier stage compounds in its pipeline targeting Immuno-Oncology and Pain Management. Combined with ZTlido that should see ~$200 million in peaks sales (according to Oppenheimer), Sorrento would seem to have a favorable risk/reward profile. Insiders obviously would agree given their recent purchase. One strategy to accumulate shares in Sorrento would be to buy half a stake now and another half when the company's announces a capital raise in the near future.
Hounds follow those who feed them.” ― Otto von Bismarck
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