Sorrento Resists M&A Frenzy
US Biotech Rejects Unsolicited Bid
Executive Summary
Two pharma companies have made an offer for Sorrento Therapeutics that could triple the pain management and immune-oncology specialist's value but the San Diego-based group is holding firm.
The merger and acquisition merry-go-round is whirling again but Sorrento Therapeutics Inc. is not jumping on yet, having confirmed it has rejected an unsolicited buyout proposal from two biopharmaceutical companies.
The San Diego-based biotech, which has late-stage assets in non-opioid chronic pain and earlier programs in immuno-oncology (IO), has revealed that a non-binding term sheet proposal submitted by the two forms to acquire its shares for between $3.00 and $5.00 per share in cash landed on Sorrento's desk on 23 November. The lower bid represented a premium of around 88% over the company's share price on 22 November while the $5.00 offer would have been huge, valuing Sorrento at $710m.
An offer that would have tripled its market capitalization must have been tempting but after reviewing the proposal in consultation with advisors, Sorrento’s board of directors declared that the offer significantly undervalued the firm and was not in the best interest of stockholders. The decision to unanimously reject the bid went down well with investors and Sorrento's share price closed up 94% to $3.11 on 25 November.
Sorrento noted that it was already in "active late-stage licensing and collaboration discussions with leading biopharmaceutical companies" for its IO products. The company claimed that "these pending transactions alone represent potential short- and long-term value creation significantly exceeding the current all-cash proposal."
The IO pipeline is headed by the firm's anti-CD38 chimeric antigen receptor-T cell (CAR-T) immunotherapy for the treatment of refractory or relapsed multiple myeloma. Sorrento has dosed five patients in a Phase I trial and a data readout is expected before the end of the year or the first quarter of 2020.
Other programs include an anti-carcinoembryonic antigen (CEA)-directed CAR-T in metastatic liver tumors, a CD38 antibody drug conjugate, and Seprehvir, Sorrento's oncolytic virus. The latter has been administered to over 100 patients in a variety of solid tumors including glioblastoma, mesothelioma, melanoma and head and neck cancer, as well as pediatric sarcomas and neuroblastomas.
Promising Pain Drug
Closer to the market is RTX, which is based on resiniferatoxin, a capsaicin analog that is 10,000 times hotter than the Carolina reaper, the world’s hottest pepper. Sorrento's formulation is being evaluated for the treatment of pain due to osteoarthritis of the knee and a Phase Ib clinical trial presented in June this year showed rapid onset (less than a week) and extended pain relief out to 84 days.
Two Phase III trials are expected to start in early 2020 and each one is expected to enrol about 400 patients. Sorrento CEO Henri Ji noted that the firm has taken RTX from a preclinical investigational new drug application to registration trials in less than two years, adding that "because of the investigators’ enthusiasm we have experienced for this ground-breaking non-opioid pain therapy in our initial trial, we expect the Phase III studies to move very quickly.”
Speaking when the Phase Ib results were published, Ji said, "We want to be cautiously optimistic, as we are dealing with a small number of patients so far, but what we see is extremely promising. As we continue on this track, and provided all goes according to plan, RTX has the potential to be on the market by 2022."
Analysts Back Rejection
Analysts at JMP Securities share Sorrento's enthusiasm and issued a note on 26 November saying "we agree that the offer substantially undervalued the company and the extensive pipeline in IO [and] pain." The firm also established a new business unit in April to focus on the market potential for its water soluble cannabidiol (CBD) formulation technology and has a presence in animal health.
The broker added, "We believe that the buyout offers do further validate the company, as large biopharma companies see value in Sorrento's pipeline. The current pace of M&A suggests possible additional competing offers may be possible." They added that RTX was a particularly attractive asset, noting that the company is seeking breakthrough designation from the US Food and Drug Administration for total knee arthroplasty (TKA) deferment. If all goes well, the analysts said, "We believe that insurers will likely insist that patients step through RTX before approving TKA for most of the 750,000 procedures performed annually."
JMP also pointed out that Sorrento owns 58% of "an interesting private company, Scilex Holding Co.." That company, which is also based in San Diego and is considering an initial public offering, sells the best-in-class topical pain product ZTLido (lidocaine) and has a spinal injection system called SP-102 in Phase III for lumbar radicular pain (sciatica). If approved, the analysts believe SP-102 "will likely replace the more than 10 million epidural steroid injections performed annually in the US."
Sorrento finished the third quarter with $35m and recently completed a $25m registered direct offering, providing it with $60m in total cash. JMP, which has a market outperform rating and a $21 price target on the stock, expects funds to last through the RTX and anti-CD38 data readouts.
The rejection by Sorrento of the unsolicited bid shows that biotech is a seller's market and serious amounts of cash need to be put on the table to force a buyout, as witnessed by Novartis AG plonking down $9.7bn to get hold of The Medicines Co.. A number of companies have seen their stock rise amid rumors they will be the next target, but for the time being, it seems Sorrento will not be tempted. (Also see "Novartis To Pay $9.7bn For The Medicines Company" - Scrip, 24 Nov, 2019.)