Sirtex Medical: $90m down the drain

The cancer therapy maker is writing off past mistakes and cutting staff.

Clinical trials are an inherently risky pursuit. Failure is the norm, they cost a fortune, and run for years – but the payoffs can be huge. Had Sirtex Medical’s clinical trials worked out, the company’s sales may have grown ten-fold. You can't blame them for trying.

The SIRFLOX, FOXFIRE and SARAH studies assessed Sirtex's SIR-Spheres as a treatment to delay the progression of liver cancer, with hopes the research would convince doctors to use the product at an earlier stage of treatment. Alas, things didn't work out that way.

Key Points

  • Studies written off

  • Staff numbers to be cut 15%

  • Reasonable growth expected for 2017

The board has written off the entire $90m carrying value of those studies. Although the write-off is a non-cash charge, it essentially represents the research and development (R&D) expenses that went into conducting the trials. The cash went out the door yesterday; the balance sheet is just playing catch-up.

The dream for SIR-Spheres to become a front-line treatment is gone, but there is still a decently-sized market for SIR-Spheres as a last resort treatment. Management estimates the total salvage market to be around 184,000 patients a year, compared to the 12,000 doses of SIR-Spheres sold in 2016.

While the studies suggest SIR-Spheres aren’t better than competing therapies used earlier in the ‘treatment ladder’, there’s still plenty of evidence that treatment with SIR-Spheres is better than doing nothing at all. The company is far from dead.

Staff cuts

The write-off of intangibles will reduce the non-cash amortisation charges moving through the income statement, and the company has taken steps to reduce costs in general. In addition to the $7m of R&D and administrative cost cuts already underway, management said it will cut staff numbers by 15% to boost profitability. One of the casualties appears to be the company’s chief medical officer, Dr David Cade, who 'has decided to take on a new opportunity' after 14 years with the company.

The restructuring will generate a one-off $5.3m charge related to employee redundancy payments, but should lead to significant long-term savings. Sirtex spent $69m on employee benefits in 2016, so $10m of savings a year from the staff cuts seems a reasonable guess.

The company reports its annual result on 23 August but management gave a sneak peek into the big numbers. Total dose sales of around 12,590 were up 5.5% compared to last year and earnings before interest, tax, depreciation and amortisation (EBITDA) was around $72m after removing the effect of currency fluctuations. Sales in the Americas rose a sluggish 5% but Asia-Pacific sales increased a healthy 11%.

With the share price up 36% since Hope fades for Sirtex Medical from 19 May 17 (Hold – $11. 54), the stock trades on a price-earnings ratio of 19 based on consensus estimates for 2017 earnings.

The failed studies mean that Sirtex is unlikely to grow at anywhere near the rate of the past decade, and there is now extra risk that the company's sole product will one day be made obsolete by new cancer therapies that end up higher in the treatment ladder. Nonetheless, with $99m of net cash, a stable competitive position, and still-profitable growth, we continue to recommend you HOLD.

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