Normally, you’d expect Sorrento (NASDAQ:SRNE) to be surging. The company has a hot test for Covid-19. With the recent news around President Donald Trump and other high-level administration officials getting the novel coronavirus, you’d think that the so-called Covid stocks would be soaring. Yet, they all aren’t. SRNE stock, for example, pops on news, but lately those pops don’t turn into sustained uptrends.
Many of the Covid-19 testing stocks have underperformed lately, even as some of the vaccines have faced delays. I think traders might be facing a bit of fatigue with the pandemic. While we’ve heard tons about potential Covid cures, tests, and vaccines, very little of it has turned into actual results yet.
That holds for Sorrento as well.
When Will Clinical Developments Turn Into Revenues?
The leading issue with Sorrento — and numerous other Covid-19 stocks for that matter — is a lack of commercial success. It’s one thing to have a bunch of potential blockbuster products in clinical trials. That’s certainly enough to drum up excitement in the early part of a media cycle.
But we’ve been dealing with the coronavirus since February now. At some point, it’s not enough to have possible solutions that may be available later. Instead, the market gets more picky and only focuses on companies that have real commercial sales, or high-end revenues from key partnerships such as the government’s Operation Warp Speed.
For the quarter that ended in June, Sorrento did show some signs of progress. But it wasn’t nearly enough. Revenues jumped from $6.5 million to $9 million. In a vacuum, that might seem like a big move. However, Sorrento is currently spending $57 million per quarter in total operating costs, so whether it earns $6 million or $9 million, it’s just a drop in the bucket compared to Sorrento’s overhead.
A Confusing Pipeline
One interesting bit of the Sorrento story is that the company has a ton of irons in the fire. Usually, a Covid-19 company is working on tests, or treatments, or a vaccine for that disease. There’s a singular focus.
Sorrento, by contrast, has a wide variety of products specifically for Covid-19. Then it has other lines of intellectual property as well, including potential treatments for cancer and dealing with pain management. The potential issue is that Sorrento may be stretching its resources too thinly.
After all, Sorrento spends about $100 million per year on research & development. That’s a substantial sum, no doubt. But it’s not a huge one given the vast scope of the company’s various research projects. Additionally, and rather surprisingly, the company’s R&D spend actually dropped slightly year-over-year between Q2 2019 and Q2 2020.
You’d think that with all the Covid-19 opportunities, Sorrento would be pushing the pedal to the metal on its clinical programs. But, so far, its budgeting hasn’t reflected that.
This is the sort of thing that gives short sellers more ammunition to question what’s going on. There’s not necessarily anything wrong. In fact, it can be a sign of good discipline when a management team controls its spending. But on the other hand, the skeptics may be right that some of Sorrento’s announcements have done more to fuel the stock price than anything substantive.
Again, it all comes back to revenues; Sorrento needs to start monetizing its clinical pipeline in a major way before investors will truly trust the story.
SRNE Stock Verdict
Time is ticking faster and faster for the Covid-19 stocks. A potential second wave this fall gives companies like Sorrento a chance to validate their clinical pipeline. But if it doesn’t happen in the near future, the window of opportunity will close. Once a vaccine is commercially available, traders will rapidly lose interest in Sorrento and other such names.
Unlike some of the other Covid-19 plays, SRNE stock has plenty of other things in the cupboard. The company isn’t a one-trick pony, and the stock won’t necessarily collapse once the Covid-19 vaccines are approved.
However, Sorrento has a market capitalization of $3 billion. That’s an awfully large figure for a company that is currently generating just $40 million annually in revenues and is burning tons of cash. Further to that, while Sorrento has a massive clinical pipeline, it has so far failed to demonstrate much commercial success. Recent management shake-ups are also concerning. All this could change. But for now, SRNE stock is still a high-risk speculation. And with the company failing to get much sales momentum going yet, traders should be careful first and foremost.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.