Sorrento: Great time for a capital raise

Sorrento was Friday’s headline trade. The company’s CEO stunned the world by claiming that Sorrento had a 100% efficient cure for COVID-19. Investors and speculators alike flocked to the company’s stock and sent the price to the moon. This is one of those cases where you have to act fast.

(Source: Sorrento)

So, here I am. What to say about this company? They seem to be the type of company that works for long years in one field trying to find a huge breakthrough that props them up to fame and fortune, which helps them to develop a pipeline of products. In this case, they have been working on immunotherapies for suppressing and/or killing off cancer cells. However, as nothing in life goes according to the plan, their breakthrough might come from the current pandemic.

About the antibody discovery, it seems to work under laboratory conditions. They still have to make clinical trials. The management claims to have the ability to produce 200.000 units a month, and each unit offers immunity for two weeks. To scale-up, they would have to build more capacity or partner with some other company.

Given that the company has not produced profits, and it has low revenues, I think that there should be reasonable doubts about the execution of a manufacturing scaling. Arguably, the company has little experience in dealing with that. Additionally, the cash seems to be insufficient for that type of investment.

(Source: Sorrento filings)

Therefore, they would have to make a capital raise, which by the way they’ve already hinted in a late April’s filing:

(Source: Sorrento filings)

Recapping:

  • Promising therapy.
  • Still missing clinical trials.
  • Restricted capacity (200k a month).
  • Doubtful ability to perform a manufacturing scaling without problems in a short period of time.
  • Likely to have to tap the capital markets for equity (shareholder dilution).
  • Lots of competition coming from dozens of powerful comanies.

My take on Sorrento

The company seems to be on some promising stuff, and it is likely using this as an opportunity to get more capital, in order to fuel growth. That’s what we all want, and I don’t a problem with that, given the claim is not fraudulent. However, I doubt that they will be able to cash-in big on the pandemic. Mainly, because their timing is a bit off, and, likely, their ability to execute on the manufacturing side won’t help.

But still, if the therapy is approved, there’s money to be made. They might turn to a bigger company and work some cash-rich deal. Or they might focus on a smaller population (healthcare staff), or even focus on another niche. Be as it may, the potential payoff for this seems to be way lower than the initial reading let transpire. After the current appreciation (and more to come on Monday), I don’t think that the risk-reward is there to be swimming with the hot money sharks.

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