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Sorrento: Multiple Progresses Have Been Made

By Grant Zeng, CFA

Sorrento Initiates Pivotal Trial of Cynviloq

On March 31, 2014, Sorrento Therapeutics (SRNE) announced that the first patient has been dosed in the pivotal clinical trial of Cynviloq for the treatment of metastatic breast cancer and non-small cell lung cancer.

The registration trial is referred to as TRIBECA™ (TRIal designed to evaluate BioEquivalence between Cynviloq™ and Abraxane®), which is an open-label, randomized, multi-center, single-dose, crossover registration study being conducted at clinical sites across the U.S., EU, and Singapore.

Based on the End-of-Phase II meeting with the FDA in July 2013, this trial was designed to gain marketing approval for Cynviloq under the 505(b)(2) regulatory pathway in the U.S. using Abraxane as the reference drug.

The 505(b)(2) BE trial design will enroll 100 patients with MBC and include a crossover 2 cycle design. The first cycle of the trial will involve 50 patients in the Abraxane® arm and 50 patients in the Cynviloq arm. The second cycle of the trial will crossover the patients into the opposite treatment groups. Dosage for both drugs will be 260 mg/m2 with 30 minutes infusion. The endpoints will be AUC and Cmax (90% CI).

The BE trial will take about 12 months to complete, which will consume roughly $5 million in direct cost.

Source: company presentation

Sorrento expects to file a New Drug Application with the FDA in the first half of 2015. According to this schedule, we expect the FDA approval and launch of Cynviloq in 2H2016. 

We think the initiation of the TRIBECA trial represents a very important milestone for Sorrento. Cynviloq is initially under development for the treatment of MBC and NSCLC in the US. Beyond MBC and NSCLC, Sorrento plans to expand label of Cynviloq into other cancer indications such as ovarian, pancreatic, bladder cancer and melanoma.

Sorrento Forms Subsidiary to Develop Animal Health Applications

Recently, Sorrento formed a wholly-owned subsidiary, Ark Animal Therapeutics. This subsidiary will be devoted to developing resiniferatoxin (RTX) for multiple veterinary health applications and vaccines against recurrent staphylococcal infections.

In studies of dogs with advanced bone cancer, treatment with RTX led to sustained reduction in levels of pain throughout a 14-week observation period. Investigators noted that pain control remained evident throughout the dogs’ remaining life, which was up to nine months in one case.

Ark’s initial development programs will focus on animal health applications for RTX. RTX targets TRPV-1, a receptor expressed on afferent nerves that has been shown to become hyper-activated in diseases associated with chronic inflammation and the resulting severe pain. RTX is highly specific for afferent nerves and does not bind to the myelinated nerves that are responsible for transmitting normal pain sensations, controlling muscle function, nor impacting cognition.

The lead application for RTX will be the treatment of pain associated with osteosarcoma in companion dogs. Additional development programs will be focused on the treatment of osteoarthritis in dogs, idiopathic cystitis in cats, as well as ocular pain and caudal heel pain in horses.

Ark will utilize existing data generated in dogs with osteosarcoma to file for conditional marketing approval with the Center for Veterinary Medicine (CVM) division of the FDA under the MUMS act, a legislation which is similar to an Orphan Product Designation for human medicines.  Under a MUMS designation, drugs with a reasonable expectation of efficacy in a minor use, such as osteosarcomas, can be marketed immediately.  The sponsor company then has four years, while it is marketing the product, to complete the registration trial and any additional work required by CVM for full approval.

The veterinary market for IT RTX presents a low cost and low risk opportunity to quickly develop a product for a manageable and profitable market. The market can easily be accessed by 2-3 sales representatives, since there are less than 100 centers in the U.S. treating cancer pain in dogs. The company is actively seeking a commercial partner in the veterinary field to commercialize RTX in the US and the rest of the world.

Ark Animal can secure the financial resources, through an initial public offering, private placement or strategic partnership, and assemble a seasoned leadership team with the expertise needed to maximize the significant opportunity in animal health. Sorrento will remain focused on developing its human therapeutic opportunities.

Ark Animal Therapeutics will also evaluate potential opportunities to develop active vaccines against acute and recurring staphylococcal infections in dogs with chronic atopic dermatitis and dairy cows with mastitis.

Balance Sheet Remains Strong 

There has been no meaningful revenue for Sorrento since its inception.

As of December 31, 2013, Sorrento held cash and cash equivalents of $31.7 million.

On October 30, 2013, the company closed an underwritten public offering of 4,150,000 shares of common stock, at $7.25 per share, and closed the full exercise of the over-allotment option granted to the representative of the underwriters to purchase an additional 622,500 shares of its common stock, with total gross proceeds of $34.6 million, before underwriting discounts and commissions and other offering expenses payable by the Company.

Concurrent with the offering, the Company agreed to issue and sell to the underwriters a warrant for the purchase of an aggregate of 182,600 shares of Common Stock, representing 4.4% of the underwritten shares issued. The underwriters warrant agreement is exercisable, in whole or in part, commencing on a date which is one year after the effective date of the Registration Statement and expiring on the five-year anniversary of the effective date of the Registration Statement at an initial exercise price per share of Common Stock of $9.0625, which is equal to 125% of the public offering price of the underwritten shares.

Current cash balance can last into 2015.

Valuation Still Attractive

We maintain our Outperform rating on Sorrento shares and reiterate our 12-month price target of $22.50. Our call is based on the strong fundaments of the company.

Sorrento is a late stage development biopharmaceutical company with diversified pipeline. The company’s lead candidate Cynviloq has advanced to pivotal clinical trial and the company will use 505(b)(2) regulatory pathway to file for approval. This approach will shorten the development time of Cynviloq dramatically and reduce the development risks accordingly. We estimate Cynviloq will reach the market in 2016. Cynviloq targets the multibillion dollar cancer therapeutics market.

The company’s second lead clinical program RTX targets the huge cancer pain market. Its unique mechanism of action and potency will help RTX command a niche of the cancer pain market if approved. RTX is currently in an investigator-sponsored Phase I/II clinical trial and Sorrento plans to initiate additional Phase I/II clinical trial for cancer pain in 2014. Recent formation of a subsidiary Ark Animal Therapeutics further expands the use of RTX in animal health.

In addition to the two lead clinical programs Cynviloq and RTX,
Sorrento also owns proprietary G-MAB® antibody library and ADC technology. Therapeutic antibodies and ADCs represent the biggest market in the current pharmaceutical industry with multibillion dollar sales. Sorrento’s G-MAB® is one of the most diverse fully human antibody library in the industry and its ADC technology holds key advantages over currently used competitor ADC technologies. The combination of these two platforms will not only expand its pipeline, but also provide partnership opportunities for the company to generate near term revenue.

Sorrento’s balance sheet remains strong. Current cash balance can last into 2015.

Sorrento has all the makings of a successful biotech company. In terms of valuation, we think Sorrento’s shares are undervalued at current market price. Since we initiated coverage of Sorrento in early January of 2014, share price of Sorrento has appreciated from $8.20 to current $13.07, an increase of 59%. But we think there is still enough room for further price appreciation in the next 12 months.

Current share price of $13 values the company at $300 million in market cap based on 23 million outstanding shares. This is still a discount compared to its peers. Sorrento is a late stage development company with diversified pipeline. Its lead candidate Cynviloq, which targets the multibillion dollar cancer market, will be approved as early as in 2016 according to our estimate. The company’s second lead product RTX, which targets the huge cancer pain market, will also reach the market in 2017 according to our estimate. Sorrento’s G-MAB® and ADC platforms have great potential to target a variety of indications and provide partnership opportunities.  

According to our model, Sorrento will become profitable in 2018 with an EPS of $1.83 based on total revenue of $206.7 million. We think Sorrento should be valued at a P/E multiple of 35x which is the biotech industry average P/E ratio. Based on our 2018 EPS of $1.83, we arrive at our price target of $22.50 per share using 30% discount rate. Our target price values Sorrento at $518 million in market cap, which is still conservative in our view.      

Risks Related To Our Price Target Include:

·         Development/Regulatory Risk: Although Sorrento’s lead program Cynviloq is in late stage development using the 505(b)(2) pathway, there are still some development and regulatory risks. The company’s RTX program is still in mid-stage development and development/regulatory risk is higher than Cynviloq. The G-MAB® and ADC programs are in preclinical development and will have a long way to go to reach the market. Both clinical and regulatory hurdles are significant at this point for these two programs.

Market Risk: The US stock market has enjoyed a significant run in 2013. This may not be repeated in 2014. Market fluctuation will also impact our price target though it’s independent from the company’s fundamentals.


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