Sirtex Medical

Liver cancer treatment company Sirtex Medical continues to report good growth in dose sales, which rose 16% during the first half to 2,698. Despite weakness in Europe, strong sales in the US— particularly in the second quarter—demonstrate excellent business momentum.

The higher Australian dollar restrained revenue growth, up 8% to $36.8m. Net profit rose 69% to $6.1m, although this figure is essentially fictional given the accounting policy change discussed on 29 Aug 11 (Speculative Buy – $4.95). Sirtex has historically only declared final dividends so no interim payment was declared and, given the expensive clinical research program, you shouldn’t necessarily expect dividends to continue.

As Sirtex capitalised $4.2m worth of expenses relating to its clinical programs in the half, perhaps the best statement in the accounts to focus on is the cash flow statement. Here the company generated operating cash flow of $5.7m in the half, but spent $5.1m on capital expenditure (‘purchase of plant and equipment’) and clinical research (‘internally generated intangible assets’).

Free cash flow, then, amounted to $0.6m. Indeed, free cash flow will be minimal for the next few years as funds are directed to Sirtex’s clinical research programs. The payment of the final dividend during the half saw the company’s cash balance fall to $39.7m.

The typically volatile stock is up 17% since 8 Dec 11 (Speculative Buy – $4.32). The growth in dose sales remains reassuring, although shareholders are foregoing strong underlying cash flow now for future potential, which may or may not be realised. That’s the risk with biotech companies, of course, but with everything on track so far, Sirtex remains a SPECULATIVE BUY.