Sirtex targets growing market

Of all the money you’ll spend on healthcare during your lifetime, nearly a third will be spent during your final six months. And sadly, this is never truer than for those suffering from liver cancer.

Liver cancer is the fifth most common cancer in the world. It's also one of the most deadly, with a combined 5-year relative survival rate from all stages of liver cancer of 15%. One of the difficulties with liver cancer is that it's so hard to treat: less than 20% of cases are suitable for surgery, and the use of external radiation is generally avoided due to the damage it causes to normal liver tissue.

These limitations have led to the development of localised treatments that deliver chemotherapy or radiation from inside the liver itself. Sirtex Medical offers one such solution. SIR-Spheres, the company’s only product, are tiny radioactive resin balls that are delivered to liver tumours via the hepatic artery.

SIR-Spheres have so far only been used during the final stages of liver cancer, but a 2,000 patient study (known as SIRFLOX) currently being undertaken could soon make them a first line of defence (see Sirtex's SIRFLOX future from 6 Mar 13 (Hold – $10.91)).

To see how this might affect the company's value, we'll look at a range of potential outcomes, with varying assumptions as to the market the company might be addressing, the price it might charge and its internal costs, including research and development.

Market size

We'll start with Sirtex’s target market. Worldwide, there are 600,000 new cases of liver cancer each year and around 15% of these can be surgically removed so don’t reach the stage where SIR-Spheres add value. More importantly, some 85% of cases occur in developing countries where treatment is out of reach due to cost. So Sirtex’s total target market is probably about 75,000 at the moment and its roughly 7,700 doses sold this year give it around a 10% market share (most patients just get the one dose).

Sadly, though, the market is growing. Liver cancer is usually caused by a hepatitis B or C infection and the number of people infected with these viruses peaked between the 1950s and 1980s, before the widespread use of vaccines. But only now are we seeing the flow-through into liver cancer. This means the incidence of liver cancer is destined to increase for at least a few more decades. We think it’s reasonable to assume that Sirtex will deliver at least 10% growth in unit sales for some time.

The real difference to Sirtex will be if the SIRFLOX clinical trials are successful. The study isn’t designed to get regulatory approval – which SIR-Spheres already have – it’s about gathering data to convince doctors that the treatment is appropriate as a first course of action. Many patients die during the intermediate chemotherapy and never have the opportunity to use SIR-Spheres. Death, in effect, is overwhelmingly the company’s major competitor. If bringing forward the time of treatment is found to improve patient outcomes, Sirtex could keep taking market share. If SIRFLOX is successful, the company could more than double the number of doses sold over the next five years.

Price per dose

SIR-Spheres are extremely expensive, costing more than $13,000 for a single dose. After falling by about 7% per year over the past five years, though, the price is now closer to competing products, such as the Canadian-based MDS Nordion’s Theraspheres, so we don’t expect it to fall by much more in developed countries, if at all.

However, if Sirtex chooses to target the huge number of liver cancer sufferers in developing markets to bolster unit sales, the company would have to reduce its price further. This would improve unit sales growth, but that may not be as simple as it sounds.

SIR-Spheres are effective at reducing the size of tumours, and so can add several months to a patient’s life, but they aren’t a cure. The cancer is still usually terminal. For this reason, developing country governments and insurers may be less willing to fund treatment as it may not be considered to have the same benefits as, say, providing a child with a Cochlear implant. SIR-Spheres will probably remain the privilege of rich countries, but a strategy change could bring the price down in order to sell more doses. 

Sirtex's value

Sirtex currently trades on a price-earnings ratio of 40, nearly twice the average for the healthcare sector as a whole. Investors are obviously baking in a lot of growth. It wouldn’t be prudent to assume such a rosy consensus will exist in the future so a PER of 30 seems more reasonable for a company of this quality.

Bringing it all together, Sirtex should continue to take market share, especially if the SIRFLOX study proves successful, so growth of unit sales to around 16,700 in five years’ time seems within reason. We’ll assume that to maintain this rapid rate of growth, the price per dose will probably fall, but not by too much from current levels – perhaps to around $12,000. This would mean about $200m in revenue for 2018.

If the profit margin remains close to its historical 20% mark, that would imply net profit of around $39m in 2018, a 12% compound growth rate from today’s $22m. And with a more conservative PER of 30, our base case is that Sirtex could be worth something around $1.2bn at that time, or $21 per share.

Sirtex has returned about 176% including dividends since Sirtex enters remission on 8 Nov 10 (Speculative Buy – $5.90). But with the share price up 42% since 6 Mar 13 (Hold – $10.91), it is starting to look expensive. We’ve outlined the many risks of investing in Sirtex in previous articles but also need to allow for the very real chance Sirtex will beat our expectations. We’re adjusting our price guide upwards to give the company a bit more leeway and continue to recommend you HOLD.