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Why I think Sirtex Medical Limited shares look good value

Credit: loctran7811

SIR-Spheres liver cancer developer Sirtex Medical Limited (ASX: SRX) is sometimes referred to as ‘the next CSL Limited (ASX: CSL)’ due to its small size and attractive cancer treatments. While I think it’s inaccurate to compare the companies in this way, due to CSL’s high use of debt, constant buybacks, and broader product portfolio, I do believe that Sirtex is an attractive investment today.

Here’s why:

  • Zero debt and $107 million (7% of market capitalisation) in cash
  • SIR-Spheres (primary treatment) currently used in just 2% of the target market
  • Good profit margins, high levels of reinvestment in development and marketing
  • Growing clinical data collection and trials for alternative purposes for SIR-Spheres should both support existing use as well as expand treatment uses over the long term (5 years +)
  • Still gaining regulatory approvals for new markets like Canada, Japan, and China
  • Growing sales at around ~15% per annum

Growth prospects

Sirtex is priced for growth, and the company has identified three core growth prospects, those being increasing the sales of SIR-Spheres, Research & Development (R&D) of new products, and mergers & acquisitions. Although the company has no prospective acquisition targets in mind this remains an interesting, albeit risky, prospect for the future.

SIR-Spheres growth plans appear to be well underway with a growing number of studies and clinical reviews supporting their use. A number of recent (successful) early stage ‘proof of concept’ trials raise the possibility of SIR-Spheres being utilised to treat other cancers in the future.

R&D spending is around 5% of sales at present, which appears low in contrast with the bigger CSL, and also pales next to Sirtex’s marketing spend of $80 million in 2016. With the company’s major product already developed, this appears to be a calculated spending decision (with marketing more likely to achieve greater returns in the near term), but could put the company at risk of being out-competed over the longer term.

One key risk is that the company fails to grow sales in accordance with its relatively high price tag. In the past, Sirtex shares have proved quite sensitive to hints that growth is slowing. However, owing to the points above, I still reckon the company is good value for long-term investors.

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Motley Fool contributor Sean O'Neill owns shares of Sirtex Medical Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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