Sirtex's SIRFLOX future
Recommendation
Sirtex Medical is an anomaly. Unlike many of its biotechnology peers it has a product being sold in the market, it produces positive cash flow, and it pays dividends. It’s no mature business, though, with plans to expand its pool of potential patients via clinical studies. It’s with this ‘I can have my cake and eat it too’ dynamic in mind that I headed along to yesterday’s company briefing.
We’re not the only ones attracted to Sirtex. Since first recommending it in Sirtex enters remission on 08 Nov 10 (Speculative Buy – $5.90), the share price has nearly doubled and investors have collected 17 cents in fully franked dividends. After such swift gains it’d be easy to justify an exit. But as we outlined in Sirtex: Interim result 2013 on 20 Feb 13 (Hold – $9.93) we’re in no rush to sell out of this business. Vast potential awaits if current clinical studies succeed.
But we’re getting ahead of ourselves. Let’s recap what the company currently does.
Key Points
- If successful in trials, SIRFLOX could provide a big increase in sales beyond 2015
- Even without SIRFLOX this company can still grow
- No debt, positive cash flow and dividends reduce risk
From salvage to first line
Sirtex is a last resort solution for those with liver cancer. After receiving multiple rounds of chemotherapy, patients may be offered SIR-Spheres – a targeted form of radiotherapy delivered to the cancer via the groin. These spheres have been shown to extend life for several months – an impressive feat for those with an aggressive terminal disease.
As a last line treatment, Sirtex is only used to treat a tiny fraction of the 2m annual suffers of primary and secondary liver cancer. Despite this, Sirtex has recorded 34 straight quarters of revenue growth at a rate of over 20% per year.
Now the company is attempting to prove that its treatment can work as a first line treatment in unison with traditional chemotherapy. In doing so it hopes to dramatically increase the pool of potential patients for its SIR-Spheres. Early signs are promising with a number of smaller studies showing an extension of life.
Sirtex is currently undertaking a number of larger clinical studies to provide statistically significant data as to the efficacy of SIR-Spheres (see Table 1). Results from the first SIRFLOX study are due by the end of 2014.
Name | Start date | Size | Percent complete | Type of liver cancer | Primary end point |
---|---|---|---|---|---|
SIRFLOX | 2006 | 518 | 94 | Secondary (1) | PFS (3) |
FOXFIRE^ | 2010 | 490 | 35 | Secondary | OS (4) |
SORAMIC | 2010 | 375 | 30 | Primary (2) | OS |
SIRveNIB | 2011 | 360 | 43 | Primary | OS |
SARAH | 2012 | 400 | 20 | Primary | OS |
(1) metastatic colorectal cancer, (2) hepatocellular carcinoma, (3) progression-free survival, (4) overall survival, ^Being completed by Oxford University |
If successful the potential market for Sirtex’s product could increase 10-fold, to around 500,000. Sirtex should be able to win a portion of this extended market. While no guaranteed path to riches, the general message is clear: expand Sirtex’s potential market and profits should leap.
If SIRFLOX doesn’t prove fruitful, Sirtex will still have its existing business which is still capable of growing at 15-20% a year. What was that about cake again?
The company is also busy improving the SIR-Spheres product by researching ways to simplify delivery to the cancer and enhance post-operative monitoring.
Preparing not predicting
Servicing this larger potential market will require Sirtex to become a much larger business and it’s currently expanding its marketing, IT and manufacturing capabilities. Two new manufacturing plants, for example, in Europe and the US, are due for completion over the next year or so.
Still, there are possible supply constraints. More dose sales require more interventional radiologists to deliver them. Sirtex doesn’t control the supply of interventional radiologists. It’s preempting this possible bottleneck by expanding the number of treatment centres that can deliver SIR-Spheres. Chief executive Gilman Wong also suggested that his team is exploring other options such as: developing its own centres, providing transport services to match demand with supply or even training additional radiologists. It remains a potential limit to growth, but management is aware of the issue and has a plan to deal with it.
More broadly, the strategy is clear: continue improving SIR-Spheres to ensure it stays relevant; increase the potential market via robust clinical data; and develop the business to meet the new demand.
No company, though, is perfect, and although it’s difficult to fault management’s actions so far, its presentations are a bit too promotional for our liking.
Single-product company
Sirtex is also exposed to risks inherent in single-product companies, particularly those that operate in the healthcare sector and require a government or insurance company to foot most patient bills.
These, though, aren’t reasons to avoid Sirtex but are risks that need to be accounted for in any valuation and the percentage of your portfolio committed to the stock – our portfolio limit remains unchanged at 3%.
Sirtex remains a stand-out medical business. We expect the existing business to continue to grow at 15-20% a year even without the SIRFLOX study.
On a current price-earnings ratio of around 40 and an adjusted free cash flow multiple of 25, Sirtex is hardly cheap. In a way though that's the wrong gauge, five years on this business could be multiples of today's size, and that's more than enough to justify holding on. The share price up 10% since 20 Feb 13 and Sirtex remains a HOLD.