Covid Can’t Hold Up This Company

Covid-19 wreaked havoc across the globe for a good two years. And while 2021 was a difficult year, 2020 was probably worse. 

Why?

Because the world was riddled with uncertainty, no one knew how long the pandemic would last, nor did they have an idea of if and when a vaccine would be ready. 

One thing we did know is that nearly every biopharmaceutical company on the globe was putting their best efforts in finding a vaccine. 

One of the firms which got a lot of media buzz in 2020 and 2021 was a small biopharma company by the name of Sorrento Therapeutics (SRNE).

In August of 2020, shares hit a high of nearly $20. But now they are trading at a buck and change. 

Financial pros consistently search our SNRE amongst Covid stocks, ranking second in our database only behind Ocugen (OCGN).

In fact, while the search volume is less than half OCGN, it’s more than double the searches for Pfizer’s (PFE) or Johnson & Johnson’s (JNJ) stock. Considering the size of those companies, that says something.

But is SRNE a buy the dip candidate? Or are its best days number?

We share our thoughts below. 

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Sorrento Therapeutics Inc (SRNE) Business 

SRNE is a clinical-stage and commercial biopharmaceutical company that develops therapies for cancer, autoimmune, inflammatory, viral, and neurodegenerative diseases. 

The company operates through two segments: Sorrento Therapeutics, and Scilex.

The SRNE pipeline includes Covid-19 programs, immunotherapy, pain treatment, and lymphatic delivery. 

The company’s pain treatment solution, ZTlido, was awarded FDA approval. 

Additionally, SRNE hopes to gain FDA approval on the following phase III drugs:  FUJOVEE, PD-L1 (Socazolimab, and PD-L1 (STI-3031) which are in the immunotherapy pipeline, and FUJOVEE and OQORY in the Covid-19 pipeline. 

SRNE has 17 products under development for the treatment of cancer. It has 8 products under development for the detection, prevention, and treatment of Covid-19. The company has 5 products under development for non-opioid pain management. And over 30 products are under development in several therapeutic areas. 

Revenues for the company are broken down into products and services, each contributing about half to the overall revenue once the economy reopened.

In the Therapeutics segment, sales increased from $13.7 million to $24.4 million in 2021 compared to the prior year, primarily driven by higher contract manufacturing service revenues. 

For the Scilex segment, revenues jumped from $26.3 million to $28.5 million during that same period due to higher product sales of ZTlido. 

While SRNE has managed to grow its revenues steadily over the last few years, it spent over $200M in 2021 on research and development. In other words, it spends 3-4X what it makes on research and development alone!

Its net income was negative $428M in 2021, about 8x greater than the firm’s revenues!

Financials

While SRNE did boost its revenues in 2021 from the previous year, the company continued to hemorrhage money, finishing the year with a negative free cash flow of $291M. 

A quick look at the image above, and you’ll notice that it isn’t uncommon for SRNE to have a negative free cash flow, as it’s been the case for the last ten years. In fact, it’s been getting worse each year. 

The firm has a free cash flow per share of -0.94. And an operating cash flow of negative $282M. 

Furthermore, SRNE has an enterprise value-to-sales ratio of 13.84x, which is significantly higher than sector median 4.77x.  

The company’s current ratio of 1.24x isn’t horrible given how unprofitable the business is.

Also, SRNE has a quick ratio of 1.04x. That means its highly liquid assets are 1.04x greater than its short-term liabilities which is a major concern.

However, the firm is sitting on a debt-to-equity ratio of 2.46x, which is not a pretty number if you’re an investor considering buying this stock. 

In terms of its capital structure, it has a total debt of $237M and cash upwards of $126M. 

Valuation

One indicator investors utilize to value non-profitable companies is the price to sales ratio. And for SRNE, that isn’t pretty.

The company has a whopping price to sales ratio of 9.97X, which is almost double the sector median of 5.4X

SRNE seems like a poorly managed company. After all, how can management explain to an investor the firm’s negative return on equity of -392%

Or its return on assets at -37%…

…or even its return on total capital of -73.5%

Even though the firm has increased its revenues by 32% year-over-year, we don’t believe it makes up for its other flaws.

Our Opinion – 2/10

If you like gambling your money then it might be worth taking a shot in SRNE. You might get lucky and one of its products has a breakthrough. And with a high percentage of the float being short, over 15%, this has the potential for a short squeeze at some point this year. 

Shares are down more than 60% year-to-date and shares are trading sub $2. 

But despite how beaten up this stock is, we don’t believe it is a good buy here. With interest rates rising, it will be harder to service debts and get loans. And since SRNE has not been able to show profit yet, it is not a good market for companies like theirs. 

That’s why we believe you should stay away from this stock.