Why Sorrento Therapeutics Stock Cratered on Friday

What happened

Sorrento Therapeutics (NASDAQ: SRNE) ended the week on a down note, tumbling by nearly 11% on Friday on news of a fresh acquisition.

So what

Sorrento revealed in a regulatory filing that it has agreed, through a subsidiary, to purchase ACEA Therapeutics. Sorrento's initial payment is $38 million for the company. Among other terms, ACEA could earn up to an additional $265 million if it hits certain sales and operational milestones.

ACEA is a clinical-stage biotech that concentrates on oncology treatments, and it is already familiar to Sorrento. In May, the latter acquired exclusive rights to ACEA's abivertinib throughout the world, save for China.

Cancer attacking an organism.

Image source: Getty Images.

Abivertinib was originally developed as a cancer drug, but is now being tested as a candidate in the treatment of COVID-19. Following successful early stage testing, it has been cleared for phase 2 clinical trials in the U.S. and Brazil.

Now what

As is fairly typical for relatively young biotech companies, Sorrento is loss-making on the bottom line. Investors might be concerned that an outlay of potentially hundreds of millions of dollars for ACEA, which has already sold near-global licensing for its key pipeline drug to Sorrento, is extravagant.

Yet Sorrento is gaining ACEA's three other pipeline drugs, all of which are cancer treatments, in the deal. Perhaps at least one can be retargeted, like abivertinib, to fight COVID-19. Since Sorrento started as a developer of such drugs, to me this feels like a complementary and sensible buy.

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Eric Volkman 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.

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