Sirtex: Result 2015

It was a big year for Sirtex Medical and its flagship product, an internal radiotherapy for liver cancer known as SIR-Spheres microspheres.

The company received positive results from SIRFLOX, a large clinical trial, which showed SIR-Spheres added nearly eight months to median progression-free survival – a 63% improvement – as well as significantly lowering the risk of a patient's tumours progressing. The results suggest SIR-Spheres may be an effective first-line therapy, rather than a treatment of last resort, as is currently the case (see Sirtex trial better than expected).

Dose sales increased 20% to 10,252 in the year to June due to growing acceptance of SIR-Spheres in the medical community. Revenue rose 36% to $176m, while net profit increased 70% to $40m.

European sales were up 19%, while US sales – 69% of the total – rose 21%. There are now nearly 500 treatment centres in the US using SIR-Spheres and, to cope with growing demand, Sirtex is expanding its US and German manufacturing facilities, which it expects to triple production capacity. Sirtex increased the price per dose by 7% to US$16,000 during the year, demonstrating the company's significant pricing power.

Research and Development (R&D) spending increased 8% to $8.6m. The median cost for developing a single new drug in the US is around US$350m and the process can take a decade or more. This large upfront cost is why a treatment's price needs to be so much higher than the manufacturing cost – and why a little more of each additional sale falls to the bottom line.

As a result, Sirtex's earnings before interest, tax, depreciation and amortisation (EBITDA) margin has increased from 27% in 2010 to 31% today, and we expect margins to continue to expand as sales increase.  

Sirtex's share price has risen 18% since Sirtex trial better than expected from 15 May 15 (Hold – $28.00) and more than quintupled since we first upgraded the stock in Sirtex enters remission on 8 Nov 10 (Speculative Buy – $5.90).

The stock trades on a price-earnings ratio of 42 but, as the market leader with significant pricing power and operating leverage in a quickly growing market, it deserves its premium price – especially given the positive SIRFLOX result. We got in early with Sirtex, but rapidly growing businesses are inherently difficult to value and, as this is still a one-product company with competitors working on their own versions, we recommend you continue to lock in profits as the share price rises and maintain a maximum portfolio weighting of 3%. HOLD.