The ongoing race to make vaccines and therapies for the coronavirus has led to a tremendous amount of speculation in the market. For some stocks, these expectations have merely added fuel to the fire of a strong company's robust returns for shareholders. For others, like Sorrento Therapeutics (NASDAQ: SRNE) and BioNTech (NASDAQ: BNTX), working on coronavirus products has created massively inflated prices that are vulnerable to melting down during a market crash.
Both stocks have grown more than 130% this year, but neither company has sales revenue from the successful commercialization of any pipeline project. Likewise, these companies aren't anywhere near completing any of their coronavirus programs, so recurring revenue is not necessarily around the corner. As highly risky biotech stocks, their prices are largely determined by sentiment surrounding their future revenue -- but there's no guarantee that this revenue will ever come. Both stocks are vulnerable to losing a lot of their value in a market correction or crash, and neither is a safe harbor for investors under the best of conditions. Let's analyze each company to understand why.
Sorrento's debt is a massive liability for investors
For a biotech stock, Sorrento ticks all of the boxes that intrigue coronavirus investors. The company is trying to develop a coronavirus vaccine, a pair of diagnostic tests, and several different therapies that are catered to each stage of the disease's clinical progression. This means that Sorrento is in theory exposed to several massive upsides which it could realize simultaneously if its research and development operations proceed as planned. But the chances of Sorrento ever making it big are slim, as all of these coronavirus programs are in early stages of development and the company's financial situation is deteriorating.
Sorrento has trailing revenue of $35.54 million, $24.39 million in cash, and total debt of $220.84 million. Of that debt, $22.61 million is due in the short term. In the last 12 months, Sorrento spent $157.93 million. To stay in operation, the company also issued $79.34 million in new stock, leading to stock issuance totaling $196.94 million in the last year. To say that diluting its shareholder value at this rate is unsustainable would be a massive understatement -- but aside from taking on even more debt, there doesn't seem to be any other way for Sorrento to stay solvent in the short term. If the market is crashing, Sorrento is probably a stock that investors would want to sell, as its future is uncertain even at its present price.
BioNTech is incredibly overvalued despite being flush with cash
Unlike Sorrento, BioNTech has fewer coronavirus projects, and it isn't in as dire a condition financially. BioNTech's claim to fame in the coronavirus market is its vaccine project, which it's pursuing under the watchful guidance of Pfizer (NYSE: PFE). BioNTech's vaccine candidate is advancing quickly, and Pfizer has paid it $185 million already, ensuring that it isn't about to run out of cash anytime soon.
Nonetheless, BioNTech's other pipeline projects are still in their earliest stages, and it's unlikely that they will be advancing very rapidly if the company's energies are focused on the vaccine. BioNTech has also diluted its stock even more aggressively than Sorrento, raising 522.98 million Euros in the last 12 months while reporting cash outflows of 239.43 million Euros. This is a bad sign for potential investors, and it may also be indicative that the company is trying to take advantage of its inflated stock price while it still can.
Currently, BioNTech is trading at a trailing price-to-sales ratio in excess of 137, which is vastly higher than the biotech industry's average price-to-sales ratio of 6.88. This means that for each dollar of the company's sales revenue, BioNTech investors are paying $137, even though the overwhelming majority of other biotech stocks would cost them much closer to $6.88. If the market crashes again before its vaccine hits the market, BioNTech's bloated valuation will face a reckoning, and its current shareholders are likely to be punished.
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Alex Carchidi 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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.