Sorrento Therapeutics May Be Ready For a Pullback

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San Diego-based Sorrento Therapeutics (NASDAQ:SRNE) has become one of the hottest biopharmaceutical companies investors are watching in the rush to find a cure for the novel coronavirus. So far in the year, SRNE stock is up around 130%.

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However, that number tells only half the story. In mid-March, Sorrento shares hit a recent low of $1.55. Now they are flirting with $8. That is an increase of about 400%.

Put another way, $1,000 invested in SRNE stock in early spring would now be worth over $5,000.

Therefore, today, I’ll take a closer look at whether long-term investors should consider committing new capital into Sorrento Therapeutics.

Why Investors Became Interested in SRNE Stock

Sorrento is a clinical-stage and commercial biopharma company. Until recently, its emphasis was on immuno-oncology and non-opioid pain management. It has been working on therapies to “improve the lives of those who suffer from cancer [and] intractable pain.”

This year brought another dimension its efforts, i.e., its aggressive research on the novel coronavirus.

The company claims that the immuno-oncology portfolio will allow it to develop multimodal therapies to “attack harmful cells frequently and relentlessly” and “generate the next generation of cancer therapeutics.” In addition, it now has several Covid-19 therapy candidates.

In fact, management is hopeful about having antibody ready by this fall. In recent weeks, SRNE stock has moved along with each news release by the company on the developments regarding their coronavirus-related trials.

For example, following a press release on July 20, it surged close to 20%. The FDA gave the green light to Abivertinib for Phase 2 safety and efficacy study in hospitalized patients with moderate to severe Covid-19. The results would likely be important for patients “hospitalized with developing cytokine storm in the lungs.”

What  Could Derail SRNE Stock

The health and economic effects of the pandemic worldwide has fueled investors’ love affair with small biotech firms as well as the big pharma.

I’d encourage potential investors to read the company’s latest 10-Q SEC filing where management highlights several important risk factors. It says, “We are a clinical stage company subject to significant risks and uncertainties, including the risk that we or our partners may never develop, obtain regulatory approval or market any of our product candidates or generate product related revenues.”

The next stage is in the efforts to develop a Covid-19 vaccine is expected to involve animal studies. And following potential successful results, human trials would be likely. However, the road is a long and potentially difficult one.

Management also draws attention to the fact that it has “incurred significant losses since inception and [is likely to] incur continued losses for the foreseeable future.” In the quarter that ended March 31, net revenue came $7.7 million. Net losses were more than $69 million.

Developing effective therapies can be extremely costly, putting immense pressure, especially on a small company’s capital structure. And the competition to develop a cure for the novel corona virus is intense. In addition to Sorrento, several other companies are currently working on vaccine or drug development. They include AstraZeneca (NYSE:AZN), GlaxoSmithKline (NYSE:GSK), Inovio Pharmaceuticals (NASDAQ:INO), Moderna (NASDAQ:MRNA), Novavax (NASDAQ:NVAX) and Pfizer (NYSE:PFE).

It’d be important to remember that big pharma can not only discover a vaccine or drug, but also produce it in mass quantities, which is an essential part of the equation. Therefore, in the second half of the year, market participants may decide to de-risk away from smaller companies such as Sorrento.

Instead, they may want to concentrate on more established names with established R&D and manufacturing facilities.

Bottom Line for SRNE Stock

Shares of many biotech companies, including SRNE stock, have seen stunning gains this year, especially since late March. Now market participants are wondering if they are somewhat late to the party or if the stock could indeed go up any further. Seasoned investors realize that big sums can be made or lost by taking a bet on a potential cure that may be developed by otherwise a small biotechnology company.

Unless the company comes up with tangible results, some profit-taking in SRNE stock may be likely. Therefore, if you are an investor with paper profits, you may want to take some capital off the table.

In the long run, if the company can successfully reach the finish line and develop a therapy that is accepted by global authorities, then early shareholders are likely to be rewarded even further. Potential long-term investors should appreciate the given risk/return profile of a small biotechnology company and remember that SRNE is a highly volatile stock. It makes rather substantial moves, both up and down on a daily basis.

Finally, in case the company’s efforts are successful, it could easily find itself a takeover candidate. Needless to say, such a development would benefit investors in SRNE stock.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education, including a Ph.D. in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil holds PFE covered calls (July 31 expiry).

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