Sorrento Therapeutics Stock Is An Interesting Pick At $9

by Trefis Team
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Despite a massive 5x rise since the March 23 lows of this year, at the current price of around $9 per share we believe Sorrento Therapeutics stock (NASDAQ:SRNE) has more room for growth. SRNE stock shot up 13% in Thursday’s trade owing to the U.S. FDA clearing its Covid-19 antibody – COVI-Guard (STI-1499) – for phase 1 trials. SRNE stock has rallied from $2 to $9 off the recent bottom compared to the S&P which moved 50%, with the resumption of economic activities as lockdowns are gradually lifted. However, despite the 5x move since Mar 23, SRNE stock is actually down 50% from the highs of $19 it made in early August, partly due to the company’s decision to terminate its CFO, which didn’t bode well with investors. 

Looking at the fundamentals, the company’s revenues declined 79% from $152 million in 2017 to $31 million in 2019. While optically this looks negative, 2017 revenues in particular were higher due to a $116 million intangibles transferred to another pharma company Celularity. The company’s product revenues have grown 40x from $0.5 million in 2017 to $22 million in 2019, given the market share gains for ZTlido, which secured the U.S. FDA approval for the treatment of pain associated with postherpetic neuralgia in 2018. We believe the stock is likely to see more upside despite the recent rally and the potential weakness from a recession driven by the Covid outbreak. Our dashboard, ‘What Factors Drove 150% Change in Sorrento Therapeutics Stock between 2017 and now?‘ has the underlying numbers.

While the company has seen a decline in revenues over recent years, its P/S multiple has seen a significant increase from 2x to 40x trailing revenues. Note that a high trading multiple is common for smaller pharmaceutical companies, with promising pipelines, and that appears to be the case with Sorrento as well. 

So what’s the likely trigger for the stock?

The global spread of coronavirus has meant an increased focus on pharmaceutical companies that are developing Covid-19 related products, Sorrento being one of them with its COVI-Guard antibody. The recent development of FDA nod for phase 1 trial is important for Sorrento, with its objective to expand the study to a large trial and potentially apply for emergency use authorization (EUA) from the U.S. FDA. Now, the company in a press release stated that its application for EUA can be as early as December. The other companies developing the antibody are expected to file for regulatory nod only towards the end of Q4 or later next year. If Sorrento were to be the first company with its antibody in the market via EUA, it would result in a meaningful appreciation in the stock price from the current levels, in our view. That said, the investors willing to take such risk should also weigh in the possibility of the company not able to secure the EUA.

Over the coming weeks we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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