Bulletin
Investor Alert

Nov. 5, 2021, 4:49 p.m. EDT

10-Q: SORRENTO THERAPEUTICS, INC.

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

or Cancel Already have a watchlist? Log In

(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains "forward-looking statements" about our expectations, beliefs or intentions regarding our potential product offerings, business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made and are often identified by the use of words such as "assumes," "plans," "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," or "will," and similar expressions or variations. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described under the caption "Risk Factors" included elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission (the "SEC"). Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.

Overview

Sorrento Therapeutics, Inc., together with its subsidiaries (collectively, the "Company", "we", "us", and "our") is a clinical stage and commercial biopharmaceutical company focused on delivering innovative and clinically meaningful therapies to address unmet medical needs.

At our core, we are antibody-centric and leverage our proprietary G-MAB(TM) library and targeted delivery modalities to generate the next generation of cancer therapeutics. Our fully human antibodies include PD-1, PD-L1, CD38, CD123, CD47, BCMA, LAG3, CTLA-4, CD137 and SARS-CoV-2 neutralizing antibodies, among others. We also have programs assessing the use of our technologies and products in autoimmune, inflammatory, viral and neurodegenerative diseases.

Our vision is to leverage these antibodies in conjunction with proprietary targeted delivery modalities to generate the next generation of cancer therapeutics. These modalities include proprietary chimeric antigen receptor T-cell therapy ("CAR-T"), dimeric antigen receptor T-cell therapy ("DAR-T(TM)"), antibody drug conjugates ("ADCs") as well as bispecific antibody approaches. We acquired Sofusa(R), a drug delivery technology, in July 2018, which delivers biologics directly into the lymphatic system to potentially achieve improved efficacy and fewer adverse effects than standard parenteral therapy. Additionally, our majority-owned subsidiary, Scilex Holding Company ("Scilex Holding"), acquired the assets of Semnur Pharmaceuticals, Inc. ("Semnur") in March 2019. Semnur's SEMDEXATM ("SP-102") compound has the potential to become the first Food and Drug Administration ("FDA")-approved epidural steroid product for the treatment of sciatica. In response to the global SARS-CoV-2 ("COVID-19") pandemic, we are utilizing the Bruton's tyrosine kinase ("BTK") inhibitor (Abivertinib, acquired from ACEA Therapeutics, Inc.) in a U.S. Phase II study of cytokine storm associated with a COVID-19 infection and in a Phase II trial in Brazil in mild, moderate and severe COVID-19 patients. We are also internally developing and conducting clinical studies for potential coronavirus antiviral therapies and vaccines, including COVI-MSC(TM), COVI-AMG(TM), COVIDROPSTM, COVIGUARDTM and COVISHIELDTM; and diagnostic test solutions, including COVITRACK(TM), COVISTIX(TM) and COVITRACE(TM).

With each of our clinical and preclinical programs, we aim to tailor our therapies to treat specific stages in the evolution of a disease, from elimination, to equilibrium and escape. In addition, our objective in our immuno-oncology programs is to focus on tumors that are resistant to current treatments and where we can design focused trials based on a genetic signature or biomarker to ensure patients have the best chance of a durable and significant response. We have several immuno-oncology programs that are in or near to entering the clinic. These include cellular therapies, oncolytic viruses (SeprehvecTM) and a palliative care program targeted to treat intractable cancer pain (RTX). Our cellular therapy programs focus on CAR-T and DAR-T for adoptive cellular immunotherapy to treat both solid and liquid tumors.

From the start of the COVID-19 pandemic, our mission has been to leverage our deep expertise in developing targeted antibodies for cancer immunotherapy to create best-in-category treatments and diagnostics to ease suffering and assist in the global response to COVID-19. We have leveraged, and continue to leverage, our G-MAB library and antibody development engineering capabilities to advance a number of promising diagnostics and neutralizing antibody candidates to test and treat COVID-19 and the immune reactions associated with SARS-CoV-2 infection.

Table of Contents

Our first generation SARS-CoV-2 neutralizing antibody was STI-1499 (COVIGUARD(TM)), which was engineered to prevent antibody dependent enhancement of disease. This antibody was then optimized to produce the highly potent STI-2020, which is being developed in two outpatient formulations: COVI-AMG (IV-push injection) and COVIDROPS (intranasal). A U.S. Food and Drug Administration ("FDA")-cleared Phase I study of COVI-AMG has been completed, and the FDA has cleared a Phase II study of COVI-AMG in outpatients with COVID-19 and a Phase II study of COVI-AMG in hospitalized patients with moderate or severe COVID-19. We have also completed an FDA-cleared Phase I study of COVIDROPS of healthy volunteers and are currently enrolling patients with mild COVID-19 in an outpatient study in the UK. We are also developing two promising potential rescue treatments with Abivertinib, an oral next generation dual EGFR/BTK inhibitor, to treat moderate to severe hospitalized COVID-19 patients, and COVI-MSC(TM), human allogeneic adipose-derived mesenchymal stem cells for patients suffering from COVID-19-induced acute respiratory distress syndrome (ARDS). We have completed enrollment in an FDA-cleared Phase II study for Abivertinib and an FDA-cleared Phase Ib study for COVI-MSC. We are also working with the Brazilian Health Regulatory Agency (ANVISA) to conduct a COVID-19 study with Abivertinib and MSC. The Abivertinib study is fully enrolled and we are awaiting the clinical results, and we also have clearance to begin a Phase II study with COVI-MSC. In other preclinical development, we are rapidly screening new neutralizing antibodies to address the multiple emerging variants of SARS-CoV-2 to potentially combine with STI-2020 (COVI-AMG) in a cocktail therapy (COVISHIELD(TM)). We are also developing a multi-variant mRNA vaccine to potentially provide protection for all of the current variants of concern.

In furtherance of our goal to develop products across the entire continuum of COVID-19 solutions, we are further developing a number of highly sensitive and rapid diagnostic tests. COVISTIX(TM) is a lateral flow antigen test that uses a proprietary platinum-based colloid and antibody combination, resulting in high sensitivity and accuracy. This is a simple and rapid (15-minute) test with a shallow nasal swab and is designed for point-of-care and at-home use. This product has been approved for use in Mexico as a point-of-care test. COVITRACK(TM) is a rapid SARS-CoV-2 IgG/IgM antibody test kit intended for use initially in clinical laboratories and in point of care settings to quickly identify individuals with anti-SARS-CoV-2 antibodies post-infection or post-vaccination. COVITRACE(TM) was licensed from Columbia University as a rapid single step on-site colorimetric detection test for SARS-COV-2 genomic RNA from a saliva sample using targeted nucleic acid amplification for high throughput point-of-care situations.

We have reported early data from Phase I trials of our carcinoembryonic antigen ("CEA")-directed CAR-T program. We have treated five patients with stage 4, unresectable adenocarcinoma (four with pancreatic and one with colorectal cancer) and CEA-positive liver metastases with anti-CEA CAR-T. We successfully submitted an Investigational New Drug application ("IND") for anti-CD38 CAR-T for the treatment of refractory or relapsed multiple myeloma ("RRMM"), obtained clearance from the FDA and commenced a human clinical trial for this indication in early 2018. We have dosed eleven patients. We intend to close this study to further enrollment and start up a similar anti-CD38 CAR-T construct without the myc-tag (which cannot be used in Europe), and to continue treating RRMM patients in a Phase Ib/IIa study, which is expected to begin enrollment in the fourth quarter of 2021. We have also received IND clearances from the FDA to start a Phase I trial for our anti-CD47 mAb (STI-6643) in patients with selected relapsed or refractory malignancies, and to start the first Phase I trial for our allogeneic CD38 DAR-T cell therapy in multiple myeloma patients, the first lead clinical candidate from our DAR-T platform.

Broadly speaking, we believe we are one of the world's leading cell therapy companies today due to our investments in technology and infrastructure, which have enabled significant progress in developing our next-generation non-viral, "off-the-shelf" allogeneic DAR-T solutions. With "off-the-shelf" solutions, DAR-T therapy can truly become a drug product platform rather than a treatment procedure.

With respect to our ADC program, we began enrolling patients in the first quarter of 2021 in a Phase Ib ascending dose study of our CD38 ADC for systemic Amyloid light-chain (AL) amyloidosis and RRMM. An anti-TROP-2 ADC has been approved for clinical trials in China by our partners with a drug payload SN38 (a DNA polymerase inhibitor) (ESG-401) and we have now received FDA authorization to begin clinical trials in the U.S. Additionally, based upon our recently announced exclusive licensing arrangement with Mayo Clinic for its antibody-drug-nanoparticle albumin-bound (ADNAB(TM)) platform, the next generation in ADC technology, we intend to file several INDs to treat various cancer targets.

Table of Contents

Outside of immuno-oncology programs, as part of our global aim to provide a wide range of therapeutic products to meet underserved markets, we have made investments in non-opioid pain management. These include resiniferatoxin ("RTX"), which is a non-opioid-based toxin that specifically targets transient receptor potential vanilloid-1 ("TRPV1") which, depending on the site of injection, can ablate, or destroy, nerves expressing TRPV1 or temporarily defunctionalize them. TRPV1 is responsible for the noxious chronic and inflammatory pain signaling that occurs post injury or trauma but leaves other nerve functions intact. RTX has been granted orphan drug status for the treatment of intractable pain with end-stage cancer and two Phase Ib trials (intrathecal and epidural routes) have been completed. A Phase Ib trial studying tolerance and efficacy of RTX for the control of moderate to severe osteoarthritis knee pain was initiated in late 2018 and intermediate results have shown efficacy with no dose limiting toxicities. We have received clearances to proceed with Phase II clinical trials of RTX for treating severe cancer pain (epidural) and for treating moderate-to-severe osteoarthritis of the knee pain (intra-articular). Both trials are expected to commence in 2021 and enrollment in both trials is expected to be completed in 2022.

Also, in this area, we have developed in-house and acquired proprietary technologies to responsibly develop next generation, branded pharmaceutical products to better manage patients' medical conditions, maximize the quality of life of patients and assist healthcare providers. The flagship product of our majority-owned subsidiary, Scilex Pharmaceuticals Inc. ("Scilex Pharma"), ZTlido(R) (lidocaine topical system 1.8%) ("ZTlido"), is a next-generation lidocaine delivery system, which was approved by the FDA for the treatment of postherpetic neuralgia, a severe neuropathic pain condition in February 2018, and was commercially launched in October 2018. Scilex Pharma has now built a full commercial organization, which includes sales, marketing, market access and medical affairs.

Impact of COVID-19 on Our Business

We are closely monitoring the COVID-19 pandemic and its potential impact on our business. In an effort to protect the health and safety of our employees, we took proactive action from the earliest signs of the outbreak, including implementing social distancing policies at our facilities, facilitating remote working arrangements and imposing employee travel restrictions.

On September 24, 2021, the Safer Federal Workforce Task Force issued written guidance to implement Executive Order 14042 ("Ensuring Adequate COVID Safety Protocols for Federal Contractors"), which was signed by President Biden on September 9, 2021. As a federal contractor, we have mandated that all of our employees and, in addition, contractors that enter our U.S. buildings and certain other locations, be fully vaccinated against COVID-19, subject to disability and religious exemptions, by December 8, 2021.

For more information on the risks associated with COVID-19, refer to Part II, Item 1A, "Risk Factors" herein.

Recent Developments

Acquisition of ACEA Therapeutics, Inc.

On June 1, 2021, we completed the acquisition of ACEA Therapeutics, Inc. ("ACEA") pursuant to the terms of the Agreement and Plan of Merger (the "ACEA Merger Agreement"), dated as of April 2, 2021, by and among us, AT Merger Sub, Inc., an exempted company incorporated with limited liability in the Cayman Islands and our wholly owned subsidiary, ACEA and Fortis Advisors LLC, as representative of the shareholders of ACEA, whereby ACEA became our wholly owned subsidiary. With operations in both China and the United States, ACEA is developing multiple clinical and preclinical-stage new chemical entity compounds, including the late clinical drug candidate, Abivertinib.

The total value of the consideration paid by us for the acquisition of ACEA was equal to $38.0 million plus approximately $1.9 million (which amount represented our agreed upon share of certain interest, fees and other expenses) resulting in an aggregate payment of approximately $39.9 million (which amount is subject to further adjustment for indebtedness, transaction expenses and cash, in each case pursuant to the terms of the ACEA Merger Agreement) (the "Closing Consideration"). Pursuant to the terms of the ACEA Merger Agreement, a portion of the Closing Consideration equal to (i) $38,059,326 was used to repay certain existing indebtedness of ACEA, which amount was paid to the holders thereof in the form of shares of our common stock and an aggregate of 5,519,469 shares ("Indebtedness Shares") of our common stock were issued in respect thereof based on a price per share equal to $6.8955 (representing the volume weighted average closing price per share of Common Stock, as reported on The Nasdaq Stock Market LLC, for the 10 consecutive trading days ending on the date that was three trading days prior to the Closing Date) and (ii) $100,000 was set aside for expenses incurred by the shareholders' representative thereunder. The Indebtedness Shares are subject to a true-up, as set forth in the ACEA Merger Agreement, if the price at which such shares were issued is greater than the closing price of our common stock on the date that is six months after June 1, 2021.

Table of Contents

In addition to the Closing Consideration, we will pay the ACEA equityholders (i) up to $450.0 million in additional payments, subject to the receipt of certain regulatory approvals and achievement of certain net sales targets with respect to the assets acquired from ACEA and (ii) five to ten percent of the annual net sales on specified royalty-bearing products (the "Earn-Out Consideration"). The fair value of the Earn-Out Consideration on the acquisition date was preliminarily estimated to be $186.1 million. The amount referenced in clause

The preliminary purchase price allocation was calculated based on an upfront consideration of $44.1 million, which was based on our closing share price on June 1, 2021. The ACEA Merger Agreement resulted in an upfront consideration of $44.1 million in net identifiable assets of approximately $230.2 million, which includes separate and distinct intangible assets comprised of acquired in-process research and development of $250.4 million, goodwill of $9.3 million, fair value of debt assumed of approximately $32.1 million and other net assets of approximately $2.6 million. The purchase price allocation is preliminary as we are still completing the valuation of the intangible assets, contingent consideration, taxes, the fair value of debt assumed and other net assets, changes to which may also increase or decrease the amount of goodwill recognized. Goodwill largely reflects the broad-spectrum and synergistic infrastructures and expertise in pharmaceutical and biological drug discovery, development and manufacturing, and expanded geographic coverage in China and North America. Goodwill is not deductible for tax purposes. Acquisition costs were recognized as incurred and compensation expense associated with pre-merger option awards was recognized for post-combination services. Results of operations since the date of acquisition were not material. Customary tax related matters such as the filing of pre-acquisition tax returns are subject to finalization as of September 30, 2021, and such matters may result in adjustments to the purchase price allocation.

We are still in the process of finalizing the working capital adjustments and the purchase price allocation, given the timing of the acquisition and the size and scope of the assets and liabilities subject to valuation. While we do not expect material changes in the valuation outcome, certain assumptions and findings that were in place at the date of acquisition could result in changes in the purchase price allocation.

Results of Operations

Comparison of the Three Months Ended September 30, 2021 and 2020

Revenues. Revenues were $12.1 million for the three months ended September 30, 2021, as compared to $11.8 million for the three months ended September 30, 2020.

Revenues in our Sorrento Therapeutics segment increased from $3.9 million to $4.5 million for the three months ended September 30, 2021 compared to the same quarter of the prior year and were primarily attributed to higher contract manufacturing service revenues.

Revenues in our Scilex segment decreased from $7.8 million to $7.5 million for the three months ended September 30, 2021 compared to the same period of the prior year. The decrease is attributed to higher gross-to-net provisions for Medicaid utilization related to sales of ZTlido.

Cost of revenues. Cost of revenues for the three months ended September 30, 2021 and 2020 were $3.4 million and $2.7 million, respectively, and relate to product sales, the sale of customized reagents and providing contract manufacturing services. These costs generally include employee-related expenses, including salary and benefits, direct materials and overhead costs including rent, depreciation, utilities, facility maintenance and insurance.

Cost of revenues for our Sorrento Therapeutics segment increased by $0.1 million and was driven by the increase in revenues.

Cost of revenues for our Scilex segment increased by $0.6 million and was attributed to higher provisions for excess inventories.

Research and Development ("R&D") Expenses. R&D expenses for the three months ended September 30, 2021 and 2020 were $49.4 million and $32.0 million, respectively. R&D expenses primarily include expenses associated with isolating and advancing human antibody drug candidates derived from our libraries, as well as advancing our RTX, COVID-19, SP-102, oncolytic viruses, ADC and oncology programs. Such expenses consist primarily of salaries and personnel-related expenses, stock-based compensation expense, clinical development expenses, preclinical testing, lab supplies, consulting costs, depreciation and other expenses.

Table of Contents

R&D expenses for our Sorrento Therapeutics segment increased by $18.2 million as compared to the same quarter of the prior year and were driven by higher headcount and increased clinical development costs spent on advancing our various R&D programs.

R&D expenses for our Scilex segment decreased by $0.7 million as compared to the same quarter of the prior year and were driven by lower clinical development costs.

Acquired In-process Research and Development Expenses. Acquired in-process research and development expenses during the three months ended September 30, 2021 totaled $11.1 million, of which $10.2 million related to our investment in Deverra Therapeutics, Inc. during the period as further described in Note 4 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, and $0.9 million related to investments in various licensing arrangements entered during the period.

Acquired in-process research and development expenses during the three months ended September 30, 2020 totaled $34.8 million and related to various licensing arrangements entered into during the period.

Selling, General and Administrative ("SG&A") Expenses. SG&A expenses for the three months ended September 30, 2021 and 2020 were $48.5 million and $24.3 million, respectively, and consisted primarily of salaries and personnel-related expenses, stock-based compensation expense, professional fees, infrastructure expenses, legal and other general corporate expenses.

SG&A expenses for our Sorrento Therapeutics segment increased by approximately $20.4 million and were primarily attributed to higher headcount, professional fees and stock-based compensation expense as compared to the same quarter of the prior year.

SG&A expenses for our Scilex segment increased by approximately $3.8 million and were attributed to higher professional fees.

Loss on Derivative Liabilities. Loss on derivative liabilities for the three months ended September 30, 2021 was $1.8 million compared to a loss of $1.0 million in the same quarter in 2020 and was primarily attributed to revised probabilities and revised sales forecasts as further described in Note 3 of the accompanying notes to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Loss on Marketable Investments. Loss on marketable investments reflects $6.4 million of realized losses from the sale of our shares of ImmunityBio, Inc. during the period and $7.7 million in unrealized losses related to the change in fair value of our shares of Celularity Inc. We recorded approximately $0.7 million in unrealized gains related to other investments during the period.

Interest Expense, net. Interest expense for the three months ended September 30, 2021 and 2020 was $2.9 million and $2.6 million, respectively. The decrease resulted primarily from a decrease in interest expense associated with the term loans with Oaktree Capital Management L.P. and affiliates (the "Oaktree Term Loans"), which were fully repaid in the year ended December 31, 2020. Interest income was immaterial for both periods.

Income Tax Expense. Income tax expense for the three months ended September 30, 2021 was $0.4 million as compared to $0.1 million for the three months ended September 30, 2020. The increase in income tax expense was primarily attributable to return to provision adjustments and income tax payments, offset by income tax benefits from stock-based compensation windfall, revaluation of deferred taxes for U.S. state blended effective tax rate adjustments, and changes in valuation allowance.

Net Loss. Net loss for the three months ended September 30, 2021 and 2020 was $120.0 million and $87.1 million, respectively.

Comparison of the Nine Months Ended September 30, 2021 and 2020

Revenues. Revenues were $39.8 million for the nine months ended September 30, 2021, as compared to $28.5 million for the nine months ended September 30, 2020.

Revenues in our Sorrento Therapeutics segment increased from $9.7 million to $13.0 million for the nine months ended September 30, 2021, compared to the same period of the prior year and were primarily attributed to higher contract manufacturing service revenues.

Revenues in our Scilex segment increased from $18.8 million to $22.3 million for the nine months ended September 30, 2021 compared to the same period of the prior year and were attributed to increased product sales of ZTlido.

Table of Contents

Cost of revenues. Cost of revenues for the nine months ended September 30, 2021 and 2020 were $9.9 million and $7.4 million, respectively, and relate to product sales, the sale of customized reagents and providing contract manufacturing services. These costs generally include employee-related expenses including salary and benefits, direct materials and overhead costs including rent, depreciation, utilities, facility maintenance and insurance.

Cost of revenues for our Sorrento Therapeutics segment increased by $1.8 million and was driven by the increase in revenues.

Cost of revenues for our Scilex segment increased by $0.8 million and was attributed to higher sales volumes of ZTlido.

R&D Expenses. R&D expenses for the nine months ended September 30, 2021 and 2020 were $147.8 million and $77.3 million, respectively. R&D expenses primarily include expenses associated with isolating and advancing human antibody drug candidates derived from our libraries, as well as advancing our RTX, COVID-19, SP-102, oncolytic viruses, ADC and oncology programs. Such expenses consist primarily of salaries and personnel-related expenses, stock-based compensation expense, clinical development expenses, preclinical testing, lab supplies, consulting costs, depreciation and other expenses.

R&D expenses for our Sorrento Therapeutics segment increased by $71.0 million as compared to the same period of the prior fiscal year and were primarily driven by higher headcount and increased clinical development costs spent on advancing our various R&D programs.

R&D expenses for our Scilex segment decreased by $0.5 million as compared to the same period of the prior fiscal year and were primarily driven by lower clinical development cost.

Acquired In-process Research and Development Expenses. Acquired in-process research and development expenses for the nine months ended September 30, 2021 totaled $23.6 million and related to the Aardvark Asset Purchase Agreement and the entry into the Mount Sinai License Agreement during the period as further . . .

Nov 05, 2021

COMTEX_396403511/2041/2021-11-05T16:48:49

Is there a problem with this press release? Contact the source provider Comtex at editorial@comtex.com. You can also contact MarketWatch Customer Service via our Customer Center.

(c) 1995-2021 Cybernet Data Systems, Inc. All Rights Reserved

This Story has 0 Comments
Be the first to comment

Story Conversation

Commenting FAQs »

Partner Center

Link to MarketWatch's Slice.