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SRNE: Sorrento Establishes Collaboration with Nantworks

By Grant Zeng, CFA

NASDAQ:SRNE

The Deal 

On Dec. 15, 2014, Sorrento (SRNE) announced that it has entered into a binding agreement with NantWorks founder, physician scientist, and biotechnology entrepreneur Dr. Patrick Soon-Shiong.

Pursuant to the agreement, NantWorks and Sorrento will establish a first joint venture to jointly develop next generation immunotherapies for the treatment of cancer and auto-immune diseases. The Immunotherapy Antibody JV will be an independent biotechnology company with $20 million initial joint funding. As part of a strategic investment, Dr. Soon-Shiong's affiliated entity will acquire a 19.9% equity stake in Sorrento by purchasing common stock priced at $5.80 per share. In addition, Sorrento granted the investor a 3-year warrant to purchase 1,724,138 shares of common stock at an exercise price of $5.80 per share. 

The JV will focus on the development of multiple immuno-oncology monoclonal antibodies (mAbs) for the treatment of cancer, including but not limited to anti-PD-1, anti-PD-L1, anti-CTLA4 mAbs, and other immune-check point antibodies as well as antibody drug conjugates (ADCs) and bispecific antibodies. 

It’s our belief that Nantworks will provide the majority of the initial $20 million funding for the joint venture and that Sorrento will provide its technology and some cash funding for the JV.

Our Takeaways from the Strategic Investment and Collaboration 

This is extremely exciting news for Sorrento in a few aspects. 

First, the deal immediately boosts Sorrento’s balance sheet. Proceeds from the 19.9% equity investment generates over $40 million cash to Sorrento. The warrants will generate another $10 million for Sorrento if Nantworks chooses to exercise. As of September 30, 2014, Sorrento had $44.3 million in cash and cash equivalents.  Current cash balance can at least last into the end of 2016. 

Second, the deal with NantWorks further validates Sorrento’s antibody technology. Over the years, Sorrento has developed two important drug development platforms: G-MAB® library and antibody drug conjugate (ADC) technology. Sorrento’s G-MAB® library is one of the industry’s most diverse fully human antibody libraries available in the market today. And its proprietary C-lock™ and K-lock™ conjugation chemistries enable site-specific conjugation of toxins to the antibody, which will produce next generation homogenous ADCs with well-defined drug antibody ratios (DAR). 

Third, the joint venture will accelerate the development of Sorrento’s diverse portfolio of fully human monoclonal antibodies, ADCs, and bispecific antibodies. Management of Sorrento has been actively seeking strategic alliance in order to accelerate the development of its programs. The deal underscores Sorrento's commitment. Combination of Sorrento’s antibody technology with Nantworks’ proprietary genomic and molecular profiling technologies will bring drug candidates into clinic more quickly. 

Fourth, this is the first JV between Sorrento and Nantworks. This JV could go public soon. Based on the advancement of the first JV, the two companies could establish more joint ventures in the future in different therapeutic areas to develop first-in-class drug candidates. 

We Raise Our Price Target to $18.00  

We maintain our Outperform rating on Sorrento share and raise our 12-month price target to $18.00 per share from previous $15.00 due to the favorable agreement with Nantworks.

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 revenues.

Sorrento’s balance sheet remains strong. Current cash balance can last at least into the end of 2016 according to our financial model. 

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. 

Current share price of $7.3 values the company at $211 million in market cap based on 29 million outstanding shares. This is 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. 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 $1.26 based on total revenue of $176.8 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 $1.26, we arrive at a price of $15.00 per share using 30% discount rate. With the agreement with Nantworks in place, we add $3 to the price target which is $18.00 per share. 

Our target price values Sorrento at $522 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: Market fluctuation will also impact our price target though it’s independent from the company’s fundamentals.

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