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Rebuttal - What's Not Right With Anne Stevenson-Yang | J Capital Research's Blog - Terminal Patient

|Includes: Sorrento Therapeutics, Inc. (SRNE)

Summary

Anne Stevenson-Yang | J Capital Research published an Instablog entitled, “Terminal Patient,” disclosing a short position and concluding that Sorrento Therapeutics (SRNE) “is a zero”.

This article was published on 3/27/18, just hours after SRNE released PR citing a $120.5M convertible note financing.

There are many misleading statements and omissions of fact on part of the author that have misdirected Seeking Alpha (SA) readers and investors.

I will review a number of the author’s claims, providing references and insight to demonstrate a pattern of misinformation and to seek truth against these claims.

Disclaimer

  • Information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein.
  • Information presented is believed to be factual and up-to-date, but I do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed.
  • All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change.

Overview

I have limited this rebuttal article to the following four categories:

  • claims against leadership at SRNE and its affiliates
  • claims against SRNE’s CD38 CAR-T program
  • claims against product development through partnerships and / or acquisitions
  • claims against SRNE’s business relationship with NantWorks entities

The lack of rebuttal to other claims by Anne Stevenson-Yang | J Capital Research in their article, “Terminal Patient,” does not constitute validation of these claims on my part. Any other claims will be systematically reviewed, as need permits.

Part I: Rebuttal to claims against leadership at SRNE and its affiliates

Claim 01

The author cites multiple, unidentified current and former employees and associates who make claims against SRNE for mismanagement. Some examples include:

“I resigned my position with Sorrento” after being asked to engage in “morally objectionable” behavior.
“Maybe it was the best they could do at the time,” said a former executive”
“Another said that Sorrento acquired assets with “absolutely zero expertise in these areas.” He called the acquisitions “pretty crappy stuff.”

Rebuttal

For all the SA community knows, these quotes are ALL made up. No one employee or associate, former or current, has been identified or has talked ON the record for their article. Given the author’s short position and multitude of misinformation (that will be presented), I am concerned. I feel that this article should print the names of those making these claims or have this reviewed by the SEC as these are serious accusations.

Claim 02

“Ji does have credentials as a scientist, but not really in biotech. His PhD is in animal physiology. He has only an undergraduate degree in biology and no record of published research papers in peer-reviewed journals.”

Rebuttal

There are no standard credentials for a pharmaceutical CEO. To propose that such a standard exists is absurd! In fact, in 2016, an article published by Healthcare Global lists the 10-top paid biotech/pharma CEOs for the year. Of those - only three have MDs degrees, while six have miscellaneous degrees and drum roll... one has ONLY a high school degree! So, to further try to correlate CEO degrees with success is meaningless and misleading.
Reference: http://tinyurl.com/y8h...

Claim 03

“Now, senior managers are leaving so fast that Sorrento can hardly issue the 8-Ks.”

Rebuttal

People have left, but the real question is, is this unusual for a clinical stage biotech? Let’s start where it matters. First, let’s look at the CEO. Henry Ji has been with the company since 2006 and CEO since 2012. That is over 12 years. No concern there. Next up, let’s look at the Board of Directors…. According to a study by Life Sci VC, 25% of the biotech Board Directors will turnover in the first 1-2 years, and up to 50% will turnover in 3-4 years. Knowing this info, there is no surprise with the current Boards tenure then: two of them have been on for less than one year, two have been on two to three years and the other three have been on for five plus years. This is business as usual. Further, there is no point to go down the management hierarchy as the CEO and Board represent the core leadership and the stability of the company.
Reference: http://tinyurl.com/ycb...

Claim 04

“The new CFO, Jiong Shao, is a lifetime investment banker who does not have an accounting degree and is not a CPA. Shao’s principal qualification, according to the company, is that he “helped to raise billions of dollars from investors.”

Rebuttal

The new CFO, Jiong Shao, does not have a CPA. But is a CPA required to be a CFO? Certainly not. Let’s look at the degrees that Mr. Shao holds… CFA (Chartered Financial Analyst), CMT (Chartered Market Technician), MBA (Master's degree in business). The last title, was received from Duke and combined with years of experience in the Chinese market makes him an ideal hire to pursue the Hong Kong HKSE dual list once the new rules finalize in late April.
Reference: http://tinyurl.com/yat...

Part II: Rebuttal to claims against SRNE’s CD38 CAR-T program

Claim 05

"In the slide below, Sorrento makes the preposterous argument that its CD-38, so named because it binds to a particular type of cell, is somehow as good as two CD-19s."

Rebuttal

Indeed, there is no linear relationship between the two receptors. That being said, however, there is minimal expression of CD19 on myeloma plasma cell surface, whereas there is strong, uniform expression of CD38 on myeloma cells. This fact highlights that the CD38 target may be an optimal over the CD19 target. Hence the ≥ operator.
Reference: http://www.bloodjournal.org/content/130/24/2594

Claim 06

"At least 20 companies are developing other CD-38-directed treatments... With at least 17 competitors, we question why the company would describe itself as having the “Most Advanced CD38 CAR-T program in Development.”

Rebuttal

The provided table highlights that multiple companies are developing drugs around the CD38 target. This is where the similarities end however. From the list, SRNE is the ONLY CD38 CAR-T. The rest are antibodies, ADC's, BCMA CAR-T's or drugs focusing on other targets. This lack of insight on the author's part is concerning. So, YES, the company can claim they have the most advanced CD38 CAR-T program. Of note, SA readers would be interested to know that the company is shortly moving its CD38 CAR-T program forward once their IND is approved with a newly registered P1 Trial on ClinicalTrials.gov under NCT03464916. Given that the IND was filed on 3/8/18, look out for a potential 4/8/18 announcement.

Part III: Rebuttal to claims against product development through partnerships and / or acquisitions

Claim 07

Let’s start with Scilex and the ZTlido patch... ”But even this modest achievement is a me-too: we count at least 10 commercial lidocaine patches, and they deliver more pain medication than does ZTlido, which has a 1.8% concentration.”

Rebuttal

Indeed, ZTlido has a 1.8% lidocaine concentration. This is due to Scilex’s advancements in transdermal drug delivery, as they only need 36mg of lidocaine versus the 700mg of lidocaine in the competitor’s patches. Does this mean it delivers less pain med like the author states? Certainly not! The author is confused between % of drug in the patch and drug delivery. In fact, a phase 1 study showed “bioequivalence of ZTlido to Lidoderm and that the two products were comparable on two key pharmacokinetic parameters: maximum drug plasma concentration (Cmax) and total drug exposure (area under the curves, or AUCs).” This means that ZTlido delivers the same amount of pain med as its competition, not less!

Reference: http://tinyurl.com/y85...

Claim 08

“In other words, Sorrento’s single marketable product is a Band-Aid with some analgesic cream.”

Rebuttal

When it comes to medicine, it’s best to reference clinical guidelines for standard of care. According to the 2017 American Family Physician guidance on Herpes Zoster and Postherpetic Neuralgia: Prevention and Management, topical lidocaine patches are considered one of the clinically validated treatments. Given that ZTlido had to go through the FDA (for approval of a prescription strength product), certainly it is much more than the Band-Aid the author claims it to be.
Reference: http://tinyurl.com/y9k...

Claim 09

“These bandages retail for $2.79.” The author is referencing an included an image of Walgreens Antibiotic Clear Bandages.

Rebuttal

It can only be assumed that the author is implying that prescription strength ZTlido is equivalent to an over-the-counter box of Walgreens antibiotic clear bandages. This association is wrong on multiple levels. First, the antibiotic bandages contain an antibiotic and not the analgesic lidocaine. Second, antibiotics are not even used to treat postherpetic neuralgia! Is this intent to deceive? I cannot think of any valid reason the author would mislead readers in this way.

Claim 10

“The rest of the company is a grab bag of biotech ideas without a development focus. There is a pain medication idea based on chili peppers called Resiniferatoxin (RTX).”

Rebuttal

SRNE has two products focused on pain management: ZTlido and RTX. Non-opioids for pain is the second main focus of the company and is highlighted on SRNE’s homepage. Let’s review the development plans for each. ZTlido just received FDA approval on 2/28/18 and the CEO has implied a partnership or spinoff is possible. So, it’s fair to say, the product is developed and on its way to the market. Second, the CEO has also noted in his most recent letter to shareholders that the development of RTX is ongoing, citing have “completed treatment of first cohort (03/12/18) and entered into second cohort treatment in the epidural RTX trial for intractable cancer pain (RTX-001)” and “1H18 RTX IND filing and first patient enrolled for intra-articular osteoarthritis pain.” In addition, the company’s subsidiary ARK Animal Health is also developing RTX to control bone cancer pain in dogs. So, this claim is again false too, as it’s clear that the company has development plans for both ZTlido and RTX.

Claim 11

“Nothing has been heard from… Yuhan Corp., with which Sorrento has had a cooperation for two years.”

Rebuttal

Over a month and a half before this article was published, Sorrento released PR citing that the South Korean Ministry of Food and Drug Safety approved the “IND for the initiation of clinical trials for Sorrento-discovered anti-PD-L1 monoclonal antibody STI-A1015 (IMC-001).” This is the green light the company needs to advance clinical trials in humans. It is not clear why the author left this key information out of the article, but would include the more recent financing note.
Reference: http://tinyurl.com/yax...

Claim 12

“A cooperation with Lee’s on the ZKAB001 oncological antibody has not advanced in nearly four years.”

Rebuttal

About a month before this article was published, Sorrento released PR citing that Lee’s Pharmaceutical received approval to proceed with the clinical trials for ZKAB001. Again, this is the green light for the company to advance clinical trials in humans. It’s not clear why the author left this key information out of the article either, but would include the more recent financing note.
Reference: http://tinyurl.com/yb5...

Claim 13

“For example, in November 2016, Sorrento agreed to acquire Virttu Biologics for $25 mln in shares of Sorrento and TNK Therapeutics for unclear reasons.”

Rebuttal

I encourage all SA readers to visit the homepage of Sorrento Therapeutics. You will see two main areas of focus highlighted: 1) immuno-oncology and 2) non-opioids for pain. Virttu was acquired to build the immuno-oncology franchise of Sorrento, as it is Virttu’s lead oncolytic virus product SEPREHVIR that drove this acquisition. There is nothing unclear about its intent.

Claim 14

This isn’t so much a claim, but a lack of omission and acknowledgement on a significant partnership – the Celularity partnership that started in 2016.

Rebuttal

In 2016 and 2017 Sorrento contributed to the formation of Celularity. Sorrento’s initial net investment was $10 million, as well as licensed intellectual property (i.e. CAR-T) that gave Sorrento a 25% stake in the new company. Sorrento PR released an update over a month prior to the publishing of this article announcing the formation of the company, which had raised $250 million among multiple partners. It is not clear again why the author left this key information out of the article, but would include the more recent financing note.
Reference: http://tinyurl.com/yc6...

Part IV: Rebuttal to claims against SRNE’s business relationship with NantWorks entities

Claim 15

"The second major sluice gate for assets out of the company has been the network of companies sometimes called the 'Nant network.'"

Rebuttal

Indeed, SRNE has had a number of business deals with Patrick Soon-Shiong directly or indirectly through Conkwest (later renamed NantKWest), Cambridge Equities or the various NantKWest off shoots. But, does this amount to a net negative investment for SRNE? Let’s take a look…

*The following information was compiled from SRNE 10-K's for the years 2014, 2015, 2016 and 2017

01. SRNE joint venture (JV) with NantBioCell to form: Immunotherapy Antibiody JV

  • First referenced in 12/2014 with plan for 2015 initial joint funding of $20M (60% from NantBioCell, 40% SRNE)
  • No further reference – assumed to have not finalized
  • Net effect on SRNE: none

02. In conjunction with 01, Cambridge Equities buys stock in SRNE

  • In 12/2014, Cambridge buys an aggregate of 7,188,062 shares of SRNE for aggregate purchase price of $41.7M
  • Cambridge also receives warrants to purchase 1,724,138 shares of SRNE stock
  • Net effect on SRNE in 2014: $41.7M
  • In 2016, SRNE rebuys all shares back for 15.6M and Cambridge Equities forfeits its right to exercise its warrant to purchase SNRE stock
  • Net effect on SRNE in 2016: less 15.6M
  • Effective gain for SRNE: $26.1M

03. SRNE buys stock in Conkwest (NantKWest)

  • In 12/2014, SRNE buys 5.6M shares of Conkwest (NantKwest) for $10M
  • Net effect on SRNE in 2014: less $10M
  • In 2016, SRNE sells all NantKwest stock back
  • Effective gain for SRNE: $27.2M

04. SRNE business agreement with NantCell

  • In 4/2015, SRNE grants exclusive license to NantCell related to certain antibodies, ADC and two CAR-TNK products. In return, SRNE gets $10M upfront and $10M shares of NantCell stock (valued at $100M)
  • Net effect on SRNE in 2015: $10M and $10M shares of NantCell stock

05. SRNE buys stock in NantBioScience

  • In 4/2015 SRNE buys 1M shares of NantBioScience for $10M
  • Net effect on SRNE in 2015: less $10M with 1M shares of NantBioScience gained

06. SRNE sells IgDraSol to NantPharma

  • Deal done in 5/2015 for which SRNE receives $90.1M ($60M of which is to go toward JV with Nantworks)
  • SRNE reports net profit of $69M in 2015
    • In 7/2015, SRNE forms JV with NantBioScience: NantCancerStemCell (NantStem) with $100M initial investment
    • SRNE contributes $20M, NantBioScience contributes $80M
    • In 4/2015, SRNE forms JV with NantCell: NantiBody with $100M initial investment
    • SRNE contributes $40M, NantCell contributes $60M
  • In 2/2018 SRNE was notified by NantiBody that it had purchased IgDraSol from NantPharma in exchange for $90.1M, leading to an equity loss of $36M for SRNE
  • Net effect on SRNE in 2015: 20% equity stake in NantStem, 40% equity stake in NantiBody (but equity valued at $4M now), and $9M gain

To summarize then...

SRNE now owns the following NantWorks stocks:

  • NantCell: $10M shares
  • NantBioScience: $1M shares
  • NantStem: 20% equity
  • NantiBody: 40% equity (which a majority of the cash was used to buy IgDraSol) and hence 40% of IgDraSol

...and SRNE has received net cash from the aforementioned deals with NantWorks of approximately $62M.

Given the positive equity that SRNE has built up in a number of NantWorks companies, as well as a net positive cash received from transactions with them, it is clear that this continued business relationship with Patrick Soon-Shiong and his NantWorks companies has been profitable for SRNE.

Claim 16

“Management seems to have given away Cynviloq (a generic Abraxane candidate), the only promising drug the company ever looked like it might commercialize, for a pittance.”

Rebuttal

Getting drugs through clinical trials isn’t cheap and takes time, eating up valuable capital. This is a constant danger for all clinical stage biotech. A frustrated Wildcat Capital acknowledged this in its Letter to the Board of SRNE in 5/2016 citing SRNE’s sale of Cynviloq to NantPharma as a result of lack of capital. Does this mean SRNE gave away Cynviloq “for a pittance?”

Reference: Wildcat Capital Issues Letter to Board of Sorrento Therapeutics

As referenced in the rebuttal to Claim 15 above, SRNE received 90.1M from the sale of IgDraSol to NantPharma, netting $69M after costs. It then put 60M back into two new JV’s, $20M (20%) in NantStem and $40M (40%) in NantiBody (which ultimately bought IgDraSol from NantPharma). So, for SRNE to get something, including cash and potential equity back in a drug that it wasn’t able to bring to market, is a success. It may not be ideal (noting that SRNE would have to still pay the Samyang development fees), but it was net positive for SRNE and allowed the company to refocus its development efforts on a streamlined Immuno-oncology and Non-opioid pain pipeline.

I feel it's also worth mentioning that the plan was to develop Cynviloq under the 505(2)(b) pathway. This is important fact, as Cynviloq wouldn’t likely have been approved until the reference drug, Abraxane, patent had expired. According to the FDA Orange Book, Abraxane maintains exclusivity at least through 9/06/2020. Taking this information into account, it seems reasonable then for SRNE to sell off an asset it lacked the funds to develop and wouldn’t even be able to get approval from the FDA for another five years! I’d call that smart business. Going forward, it’s anyone’s guess if it’s lack of money, lack of interest or patents that keep Cynviloq from moving forward at NantiBody. Time will tell.

Reference: Orange Book: Approved Drug Products with Therapeutic Equivalence Evaluations

Conclusion

This rebuttal has identified and reviewed 16 claims from Anne Stevenson-Yang | J Capital Research blog: Terminal Patient. In doing so, I have found significant misleading facts, omission of facts and emotional arguments against SRNE. I have provided reference information to counter the erroneous claims and correct the record. I hope that this information, combined with the Chairman/CEO’s recent response to stockholders, has given shareholders back the trust in SRNE that Henry Ji and his Board have worked so hard to create. I caution all readers to be highly critical of any future works by Anne Stevenson-Yang or J Capital Research work based on her seemingly maligned research.

Disclosure: I am/we are long SRNE.