Sorrento Therapeutics Q2: COVISTIX sales lag (NASDAQ: SRNE)
August 15theTherapeutic Sorrento (NASDAQ: SRNE) released its Q2-2022 results and the stock lost nearly 23% over the next two trading days, with results worse than expected. In this article, I will provide a review of Q2-2022 results, and I will support my HOLD recommendation. This is not my first post on Sorrento Therapeutics: here you will find my previous analysis of the results of the financial year 2021.
Sorrento Therapeutics currently trades at $2.12/share, which equates to a market cap of $806M, and it’s down 54% year-to-date and 75% year-over-year. If we look at the performance over the last 52 weeks, we can see that the stock has steadily declined in value until it stabilized in a range between $2 and $3 per share. The 52-week minimum is $1.24/share (May 11e2022) while the 52-week high is $9.32/share, recorded almost a year ago on August 25e2021.
Total revenue for the quarter fell 15% year-over-year (or $2.1 million), from $13.5 million in Q2-2021 to $11.4 million this past quarter. The decline in sales was primarily due to reduced service revenue for the Sorrento Therapeutics segment due to lower contract manufacturing compared to the prior year. Services revenue ($2.8M) accounted for 25% of total sales (vs. 42% in Q2-2021) while product revenue was $8.5M and accounted for 75% of the total.
It is worth saying a few words about the revenue generated by COVISTIX, Sorrento’s antigen test for the detection of COVID-19: in the first six months of 2022, Sorrento generated sales of $3.2M thanks to to COVISTIX, but these sales were all concentrated in the first quarter. -2022. Apparently, in Q2-2022, no sales were generated from this product which, according to previous reports, should have played a relevant role in generating cash flow to support Sorrento’s future growth.
Despite the decline in revenue, total operating expenses increased 14% year over year, from $114 million in Q2-2021 to $130 million in Q2-2022. The largest organic cost items are R&D, which fell 11% year-over-year to $48 million, and general and administrative expenses, which fell 4% from $50 million. dollars to $48 million. However, these cost reductions were more than offset by a one-time loss of $91m on impairment of intangible assets due to the impairment of IPR&D assets (associated with Abivertinib) acquired from ACEA in June 2021. .
Overall, Sorrento Therapeutics posted a quarterly net loss of $219 million, 30% lower than Q2-2021’s loss of $166 million.
Moving on to the cash flow statement for the first six months of the year, operating cash flow was obviously negative at -$164m, about 30% lower than Q2-2021 (-$126m) . Investing cash flow was negative at -$15m as Sorrento made investments to purchase new equipment and paid cash consideration to Virex Health for the acquisition announced in February 2022. The company added 215 M$ financing following several operations. : on the one hand, Sorrento repaid $111 million in debt (notes and bridging loan); on the other hand, the Company carried out a share issue which raised $268 million. Net debt stands at $36 million, with total debt of $107 million and cash on the balance sheet of $70 million.
Distribution agreement with CH Trading Group for ZTlido
August 17e, 2022, Sorrento Therapeutics announced a new distribution agreement for ZTlido, the lead product which was first marketed in October 2018 as a topical lidocaine-based medication for the relief of pain caused by post-surgical neuralgia. herpetic. The new distribution agreement was stipulated with CH Trading Group – an import/export operator – and aims to market the ZTlido in the Middle East and North Africa, geographical areas where today the ZTlido is still not available. The deal is quite significant as it will allow Sorrento Therapeutics to potentially increase the revenue stream generated by ZTlido as COVISTIX sales are lagging.
Marketing agreement with ROMEG Therapeutics for Gloperba
June 14e, 2022, Sorrento Therapeutics announced a new licensing and commercialization agreement with ROMEG Therapeutics for the exclusive right to distribute Gloperba, an oral liquid colchicine-based treatment for gout sufferers, in the United States. Sorrento will pay an upfront consideration of $2 million plus additional milestone payments of up to $13 million and royalties based on Gloperba’s annual sales. The strategic rationale for the deal is to expand Sorrento’s business into new areas and generate additional revenue streams: by leveraging the current distribution channels already in place, Sorrento wants to enter the drop which is expected to be worth up to $8 billion in 2025 with compound annual growth of around 16%.
To account for the impact of recent news, I developed a DCF model that derives a potential target price.
The starting point for the valuation is the revenue forecast: in particular, I assumed modest growth in services revenue (2% annual growth, in line with past performance) whereas I was more aggressive on the sales of ZTlido and Gloperba. For the ZTlido, I assumed accelerated growth due to the recently announced entry into the Middle East and North Africa markets (150% growth rate in 2023, 100% in 2024, 50% in 2025, then gradually up to 5% in 2028) while for Gloperba, I assumed that Sorrento Therapeutics could realistically target a 2% market share in the gout treatment market (of a worth about $8.3 billion in 2025). For clarity, I have not considered COVISTIX revenue because in Q2-2022 the company had no sales and – with COVID-19 seemingly in the past – it is unlikely that COVISTIX generates significant revenue in the future.
For costs, I assumed that the COGS-to-sales ratio (for products and services) remains constant over time and in line with past figures, while for research and development, I assumed a reduction progressive of around 15% per year since Sorrento has already made significant investments in recent years. To derive the free cash flow for the business, I also estimated the annual capital expenditures assuming 10% annual growth, as the business will need to keep up with the increase in production.
FCFs were discounted with a 10% discount rate and the terminal value (after 2030) was calculated with Gordon’s growth formula using a long-term growth rate of 3%.
As a result, the DCF model calculates $2.44/share, which is 15% higher than the current price.
Overall, I think Sorrento is moving in the right direction in terms of business development, with the signing of many agreements that could help diversify the business and improve revenue streams. However, it cannot be ignored that sales are down year-over-year and COVISTIX fell short of expectations, with almost no sales at all in Q2-2022. Also, the management of the company does not hold quarterly conference calls with analysts and, given the non-exceptional performance, this is starting to become a small red flag. Also, the target price calculated with the DCF model only provides 15% upside potential, which in my opinion is not worth the risk of investing in Sorrento Therapeutics. In conclusion, for investors who have bought stocks at higher valuations, I would recommend holding the stock and seeing how the future unfolds, while I would not recommend new investors to buy now.