Sirtex in rude health
Recommendation
It’s easy to fall into the trap of judging a company by the performance of its share price. For liver cancer treatment company Sirtex Medical, the stock hasn’t advanced since we commenced coverage in Sirtex enters remission on 8 Nov 10 (Speculative Buy – $5.90). Indeed, the decline from around $6.00 to less than $4.50 over the course of calendar 2011 was probably disheartening.
In an industry like this, progress takes time. But the undeniable fact is that Sirtex’s story has improved significantly over the past 18 months.
Key Points
- Dose sales marching upwards, and clinical trial program is well underway
- Litigation issues resolved
- Downgraded to Hold
Dose sales have continued to march upwards (see Chart 1). In 2010 dose sales were around 4,200 annually, in 2011 sales rose to almost 5,000, and in 2012 sales should exceed 6,000. There’s even early evidence that the rate of sales has been accelerating. On 16 Apr 12 (Speculative Buy – $5.90), we reported that third quarter dose sales rose 34%, including a 47% increase in the US market.
This is important because the US is the world’s largest healthcare market. It shows the notoriously conservative medical profession is increasingly accepting Sirtex’s SIR-Spheres technology and, vitally, that doctors believe the treatment works. Demand may also be coming from the patients themselves, who are in the late stage of disease by the time they’re eligible for the SIR-Spheres treatment. For patients unable to seek reimbursement from an insurer, the US$15,000 cost may seem a lot, but it’s hard to put a price on what could be another year of life.
While dose sales are booming, revenues have been leaning into the Aussie dollar headwind in recent years. Table 1 shows that revenue growth has been lagging dose sales, the direct result of a strong currency. With the dollar weakening a little lately, that headwind might soon become a tailwind.
2008 | 2009 | 2010 | 2011 | 2012F | |
---|---|---|---|---|---|
Sales ($m) | 38.1 | 65.6 | 64.3 | 70.3 | 82.5 |
Net profit ($m) | 1.2 | 18.2 | 16.1 | 11.5 | 14 |
EPS (c) | 2.2 | 32.7 | 28.8 | 20.4 | 25.1 |
PER (x) | 283.2 | 19.1 | 21.6 | 30.5 | 24.8 |
DPS (c) | 0 | 7 | 7 | 7 | 7 |
Yield (%) | n/a | 1.1 | 1.1 | 1.1 | 1.1 |
Franking (%) | n/a | 100 | 100 | 100 | 100 |
That would be good news, because the company is running five major clinical trial programs—costing a total of $60m—over the next five years. The aim of these studies will be to determine if SIR-Spheres is suitable for use in earlier stage cancers, different types of cancers, and in combination with more standard ‘first-line’ treatments such as chemotherapy. Patient recruitment for these studies is underway, with costs likely to peak over the next few years.
Results aren’t likely to be known for some time. There’s also no guarantee that these studies will demonstrate the company’s desired outcome; disappointment could result in a heavy fall in the share price. It’s why the risk ratings are ‘very high’, and our suggested maximum portfolio limit is 2-3%.
Thankfully, the litigation issue highlighted in the original review has been resolved. Not only did Sirtex successfully defend itself against all proceedings, but it recovered most of its legal costs as well. Founder Dr Bruce Gray seems to be retreating from the battle, having sold down his holding from 29% to 17% since 2010.
It’s pleasing to see Sirtex making excellent progress. As an emerging business in high growth healthcare markets, it’s somewhat immune from the economic malaise that is affecting other companies. If you’re a risk-tolerant investor, this provides valuable diversification in the current climate.
The share price, however, is up 6% since 16 Apr 12 and, with the stock attracting a bit more attention, we're downgrading Sirtex a notch to HOLD.