Why an FDA Approval Caused Sorrento Therapeutics' Pain

What happened

Sorrento Therapeutics (NASDAQ: SRNE) fell 24% today after announcing after the bell yesterday that the FDA approved its ZTlido lidocaine topical system for the treatment of pain associated with post-herpetic neuralgia, also referred to as post-shingles pain.

So what

FDA approvals are supposed to make companies worth more, not less, but this seems to simply be a case of "sell the news," given the massive run-up shares of Sorrento have had over the last two months as investors anticipated an approval.

ZTlido is designed to be a better version of Lidoderm, a lidocaine patch already on the market. It's designed to stay on longer and deliver more of the lidocaine in the product, but since it has the same active ingredient, there was little concern that the FDA would fret about the efficacy and safety of ZTlido. About the only thing investors had to worry about was whether the FDA would find issues with the manufacturing part of the marketing application, but that clearly wasn't an issue.

Now what

Now investors have to worry about how well ZTlido will compete with Lidoderm, which has been on the market since 1999. Two decades is a long time to change doctors' prescription habits. And since there are generic versions of Lidoderm, there may be issues with Sorrento getting ZTlido coverage by insurers with copays that patients are willing to pay.

Sorrento has hinted that it may spin off ZTlido and the related technology, which could be used to deliver other active ingredients. If it was done as an IPO -- as opposed to giving current shareholders a stake in the new company -- the spinoff could result in some much needed cash to fund development of Sorrento's pipeline of chimeric antigen receptor T-cell therapies that can treat a variety of cancers, which are much more promising -- and what investors should be focused on.

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Brian Orelli and The Motley Fool have no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.