Sirtex smashed on lower growth

For sharemarket investors, there aren't many words more annoying than ‘Trading update'. The share price of radiotherapy maker Sirtex Medical has fallen 40% following today's update, which revealed that sales growth in the first half of the financial year would be below expectations.

First-half dose sales in the Americas and Europe, Middle East, and Africa (EMEA) is expected to be a lacklustre 4–6%, well below last year's 16%. Chief executive Gilman Wong said the result is due to insurance reimbursement restrictions, increasing competition and the approval of a new drug that competes with SIR-Spheres – a last-resort treatment for liver cancer.

Earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to be in the order of $30m–32m, a decline of 9–16% compared to the prior period, though a lower EBITDA figure was expected due to an increase in research costs as the company prepares for a major clinical study next year. Management expects a better second half and that full-year dose sales will increase 5–11%, with EBITDA of $65m–74m – a decline of 0–12%.

What bothers us most about this update is that the company also warned of slowing growth prior to the 2016 full-year result but assured investors that it was due to temporary factors. Sirtex is a well-managed company, but two downgrades in seven months is a black mark – either it was generous with the word ‘temporary' or overly optimistic.

Treading carefully

These situations must be handled delicately. On the one hand, we're increasingly suspicious that Sirtex's growth may be slowing, particularly if ongoing clinical trials don't boost SIR-Spheres to first-line treatment status. Management's actions around the last two downgrades also add a slightly uncomfortable edge.

On the other hand, as we explained in Is Sirtex's $20,000 teaspoon enough?, there's plenty to like about Sirtex. The company has an approved product, $100m of net cash to fund its clinical trial and research programs, and a huge untapped market for SIR-Spheres if trials are successful in giving it first-line status. Sales growth of 5–10% is well below that achieved over the past five years, but it's still nothing to sneeze at.

Even if growth has permanently slowed, the sharp fall in the share price could mean we're being adequately compensated for it with a lower valuation and price-earnings ratio of 16. Whatever the case, this update is a reminder that one-product companies are high risk. We'll look more deeply into the situation in case it presents an opportunity, but for the time being we're sticking with HOLD.