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Why Sorrento Therapeutics Inc. Is Getting Beaten Down Today

Cory Renauer, The Motley Fool

What happened

Shares of Sorrento Therapeutics Inc. (NASDAQ: SRNE), a biotech that just earned its first Food and Drug Administration approval, are getting hammered after investors digested the fine print in a convertible note offering the company announced yesterday. The stock is down 28.1% as of 3:36 p.m. EDT on Wednesday.

So what 

Shareholders looking at Sorrento's plans to launch a lidocaine patch this year in order to fund a fledgling CAR-T program are realizing just how small their slice of any future profits is about to become. A one-time event allowed the company to squeak out an operating profit last year, but trying to advance cell-based cancer therapies through clinical trials will probably burn through every penny the company raised at shareholders' expense on Tuesday before 2019 is finished.

Chalk drawing of a downward sloping chart on a blackboard.

Image source: Getty Images.

Sorrento will raise $120.5 million by selling some complicated convertible notes that accrue interest at 5% annually and come with a buy-two-get-one-free deal. Purchasers are entitled to one warrant with an exercise price of $8.77 for every two notes they purchase. The notes convert into common stock at $7.01 per share.

Now what

Lidocaine patches have been around an awfully long time, and it's hard to see Sorrento's 72% stake in the ZTildo contributing much to the company's plans to develop complex cellular therapies. Management thinks it will exit the dilutive financing deal with around $150 million in cash, which should be enough for the next year and a half.

So far, this year's dilutions are shaping up to be a bit less intense than the 48% share count increase Sorrento shareholders suffered last year. If the note purchasers somehow converted their shares tomorrow, it would lift Sorrento's outstanding share count about 20% higher.

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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.