Sorrento: Limited Potential, High Management Compensation, Complicated Lawsuits (SRNE)

Sorrento Therapeutics (NASDAQ:SRNE) is a commercial-stage company that, I would say, made a more or less failed effort to play the Covid-19 R&D surge, but has now gone back to doing more traditional medicine where, despite its impressive-looking pipeline, it isn’t looking too good.

As Fierce wrote almost 3 years back:

California-based Sorrento flew high during the biotech boom of 2015 on the back of a deal that gave Patrick Soon-Shiong’s NantHealth rights to a nanoparticle formulation of paclitaxel. Sorrento quickly fell from that high, though, and has never come close to regaining the lost ground, starting 2020 with a share price just above $3.

That was true right before the covid boom, when the stock peaked at nearly $20. It has now settled down to a much more placid $1.5. Nothing indicates it will be quickly moving away and up from here.

In those pre-covid years, Sorrento also got entangled with a couple of Patrick Soon-Shiong companies – NantPharma and NantCell. It went this way: Patrick Soon-Shiong, through his company NantPharma, paid $90mn to Sorrento for Cynviloq, once poised to compete with Celgene’s blockbuster Abraxane, and then, allegedly, let it languish, because he also had a stake in Celgene, which owns Abraxane. Meanwhile, of this $90mn, Sorrento paid $40mn to NantCell, for certain antibody therapy joint ventures. Sorrento alleged that Dr. Soon-Shiong then had this $40mn transferred back to NantPharma – all that finally led to a lawsuit and much distraction from actually doing medicine. The lawsuit alleged a ‘Catch-And-Kill’ Scheme for Sorrento’s formulation of paclitaxel, which Soon-Shiong – sometimes called the richest person in Los Angeles – allegedly bought out to deter competition in Celgene’s Abraxane, a company in which he was the largest individual shareholder.

Dr. Soon-Shiong responded as follows to these allegations on the LA Times, which he owns:

The lawsuit is a cynical attempt to deflect from Sorrento’s own breach of contract. The allegation that we have not developed Cynviloq to protect the sales of Abraxane is false and it ignores the facts. Because it is totally without merit, we shall defend ourselves vigorously against this baseless allegation.

Dr. Soon-Shiong further explained the second transaction thus:

Because the drug required a new process, further stability testing, and a complete new Phase 1 clinical study, we sold the drug to our [joint venture] with Sorrento, which had both regulatory and formulation expertise. We opened a Phase 1 study and this study is currently open and we are actively trying to recruit patients.

According to this source, Dr. Soon-Shiong has had prior encounters with allegations of misconduct in his business dealings:

This certainly isn’t the first time that Soon-Shiong has been associated with a scandal involving repayment to his companies. In 2017, he was at the center of accusations that a $12 million grant made to the University of Utah for genetic sequencing benefitted his company NantHealth far more than the university. The wording of the grant required that $10 million of the funding was to be sent back to NantHealth to conduct research. Also in 2017, the iconic singer Cher sued Soon-Shiong alleging that he “duped” her into selling shares of Florida-based Altor BioScience at a below-market cost. In June Soon-Shiong’s NantCell a member of his NantWorks family, acquired Altor for $290 million, about $2 per share. In her lawsuit, Cher contends that the company did not tell her, along with other investors, that some of the company’s drugs were showing clinical promise in treating AIDS and HIV. Soon-Shiong’s acquisition of Altor came a month after Altor announced it received Fast Track Designation from the U.S. Food and Drug Administration for its investigational interleukin-15 agonist complex, ALT-803, in combination with Bacillus Calmette-Guérin for the treatment of patients with non-muscle invasive bladder cancer.

Here’s a New Yorker profile of Dr. Soon-Shiong for your reference. Note this text:

Soon-Shiong has been repeatedly accused of financial misrepresentation, self-dealing, price gouging, and fraud. He has been sued by former investors and business partners; he has been sued by other doctors; he has been sued by his own brother, twice; he has been sued by Cher.

Also, according to the New Yorker’s Stephen Witt:

Soon-Shiong, who has denied the allegations, told me that Sorrento had manipulated Cynviloq’s clinical data, and that this made it more difficult to pursue F.D.A. approval. He also said that the drug was “falling apart,” and had manufacturing issues. Steve Feldman, an attorney representing Sorrento in the case, rejects this claim as “baseless post-hoc explanations.” “Just because someone’s charismatic, and just because they’re a billionaire, that doesn’t mean what they’re saying is true,” Feldman told me.

Last year, and late in 2019, the following developments took place per a Sorrento press release:

In his ruling, which was dated October 9th but was served upon Sorrento on October 15th, the Los Angeles Superior Court Judge, among other things, denied Soon-Shiong’s and NantPharma’s motion to stay or dismiss Sorrento’s arbitration against them, thus allowing the case to proceed in full. The Court also granted Sorrento’s motions to compel Soon-Shiong entity NantCell’s counterclaims to arbitration, rejecting NantCell’s attempts to avoid the arbitration agreement it had previously entered into with Sorrento.

The case is still ongoing – see here for the details.

My point here is not to make a judgment between the two parties, but simply to point out that for a small biotech to become entangled in such expensive and distracting legal disputes is not conducive to its R&D work.

In the pandemic period, Sorrento CEO Henry Ji touted up a self-owned monoclonal antibody as a potential cure, “despite not testing it in animals or humans at the time. Grand statements from Ji to a Fox News reporter caused the stock to triple in value…” In early months of this year, the company bought a Chinese company with expertise in “lateral flow testing” to add to its Covistix diagnostic portfolio. However, the ebbing away of the pandemic has hurt Sorrento, as you can see in its stock chart. From a high of $6-7, it has now been reduced to $1.5, its shine lost due to the retreating pandemic.

According to Endpoint, Sorrento “first unveiled plans to take its subsidiary Scilex public by merging with the blank check company Vickers Vantage Corp I last December.” Scilex owns Sorrento’s pain portfolio, which includes approved pain patch ZTlido. Sorrento bought into Scilex and ZTlido – a treatment for post-herpetic neuralgia, a form of post-shingles nerve pain – in 2016. They will use the funds generated to develop a second product, SP-102, “which Scilex aims to commercialize for lumbar radicular pain or sciatica in 2023.” Around the same time, this molecule met the primary endpoint in a phase 3 trial, producing rapid onset of pain relief.

Other key data:

• Four weeks after a single injection, patients taking SP-102 demonstrated a statistically significant mean improvement of -1.08 on the Numeric Pain Rating Scale.

• A secondary endpoint measuring the degree of disability and estimating quality of life showed a 28% improvement at four weeks for those on SP-102 compared to baseline.

• Also, results showed that median time to open-label repeat injection was 99 days. The company said off-label injectable steroids typically provide relief for periods from less than a week to up to one month.

In its cancer focus, as well, the company announced some important steps. The FDA approved the application for Phase 2 study of Abivertinib to be conducted in participants with metastatic castrate resistant prostate cancer (mCRPC). The same molecule, in a pivotal study in NSCLC, demonstrated an overall response rate of 56.5%. Data also showed that 11 of these heavily pretreated patients had complete responses (“CR”) for a CR rate of 5.3% and median overall survival of 28.2 months.

I have tried to understand this piece of news thoroughly. A few points: this is an NSCLC trial conducted in China and the registry is here – NCT02330367. This is not a U.S. pivotal trial as mentioned in the press release above. The trial was conducted by sponsor Acea Pharmaceuticals, which Sorrento bought out last year, along with this asset Abivertinib. Another interesting piece of news of which I cannot find much detail except this BioWorld reference and this Reddit – that the molecule failed to win Chinese approval for this same indication. The failure news appeared in May, and the “pivotal trial” news appeared in August. However, they seem to be referring to the same trial – by Acea Pharma – check here and here as well. That last reference also talks about comparison with Tagrisso or osimertinib:

In these IRC-assessed preliminary topline results with more matured long-term follow up data (previously 16.8 months, now 38.8 months), Abivertinib showed significant treatment benefits in 209 response evaluable, heavily treated NSCLC patients with ORR of 56.5%, and notably a significant CR rate was seen with Abivertinib (5.3%) in comparison with that of osimertinib (Tagrisso) (0.5%)*, while the ORR rate is comparable between the two drugs.

It refers to this publication. Now, closely reading through the publication, I note that the trial is not actually directly comparing Abivertinib with osimertinib, an FDA-approved product (refer also to the NCT registry and verify that this is a single arm trial.) This is a cross-trial comparison, but the language in the above-quoted text could confuse a casual reader, as if the trial was actually comparing the CR and ORR between these two molecules.

If you look at the reference to the AURA trial given there – you can see there is mention of CR at 0.5% for osimertinib. However, without a proper discussion of associated factors – location, baseline characteristics, design and so on – such a shortcut comparison does not clarify anything.

I am also stuck by the news – referred to earlier from two sources, BioWorld and Reddit – that the molecule failed to win approval in China for the same indication. I do not have details, but was that rejection based on this same data that the company is now going to the FDA with for approval? Remember, the patients were Chinese, and the FDA, as I have discussed before, does not like to approve drugs in the US with ex-US data.

So why, despite these nice-sounding data, does this company stock remain stagnant? To my mind, investors are wary of Sorrento and its tall claims. A company will take time to recover credibility after the sort of pumping it did in the pandemic years for its antibody drug – if credibility is what the company is really after. Unless this type of data gets published in a good peer-reviewed journal, there’s no saying what a company – which once hyped up a covid cure – can claim. Sorrento is a small company, and ideally people would have loved to see intense R&D as befits its size. Instead, Sorrento behaves like a big company, larger-than-life, making huge SPAC deals, having covid cures, suing billionaire investors and making uneasy deals with them, and whatnot. These are distractions, and investors may be worrying about the nature of Sorrento’s intent.

Financials

SRNE has a market cap of $674mn and current assets of $194mn as of June. In the same quarter, the company spent $48mn in R&D and G&A, each. In the two quarters prior to June, the company spent a quarter billion dollars in “total costs and expenses.” I am guessing the company is at the very end of its cash tether in the last 4-5 months. The company was recently given a $41.7mn lifeline by B. Riley. A 10-K this year says how their auditors Ernst and Young “identified internal control issues” that may hamper proper financial reporting. All in all, this does not present a pretty picture.

Upside Risks

I discussed some of the reasons I feel bearish about Sorrento. My main objection is this: as a medical professional, I prefer that pharma R&D companies spend more time on R&D than on lawsuits and complicated deals. That is not to say such lawsuits cannot be won, and huge compensations earned. My negative thesis will change if Sorrento manages to win the ongoing arbitration suit against Patrick Soon-Shiong. It will also change if there’s more clarity and positivity surrounding their NSCLC asset.

Bottom Line

Salary.com says this small company’s CEO pulls in $19.7mn in compensation (2021 figures) – a second source confirms this figure. For context, here’s a list of big pharma CEO salaries. During my research, I found nothing to recommend this company. I will stay away.