Late on Friday afternoon the board of liver cancer treatment specialist Sirtex Medical Limited (ASX: SRX) revealed that it has fired its chief executive after receiving legal advice over his selling of more than $2 million of shares at the end of October 2016.
The shares were sold at prices inflated by guidance given to expect "double digit" sales growth in FY2017, although on December 9 2016 that guidance was revised down by the now ex-CEO to expect growth of 5%-11% based partly on hopes for a stronger H2 FY2017.
The share price collapsed in half on the back of the updated guidance and a scandal is now brewing that threatens to engulf the company with regulatory investigations from both ASIC and the ASX likely if the company has perhaps received legal advice that it has breached the financial services laws around its continuous disclosure and / or multiple other obligations.
The ASX as the market operator was already questioning the company about its disclosure obligations prior to the December 9 downgrade following what has been described as a "tip off". It also seems possible (as suggested by Fairfax news reports) that this "tip off" was from a whistleblower within the company given that it must have contained sufficient credibility to warrant an investigation, rather than being a dismissible rant from an ordinary shareholder.
Given that the regulators may be armed with plenty of evidence from a potential whistleblower and the legal report Sirtex commissioned itself, it's not hard to see more trouble ahead.
Adding to the potential problems is the possibility of fee-hungry class action lawyers salivating over the prospect of launching an action against the company for breaching (or worse) its continuous disclosure obligations over the period from when the "double digit" guidance was first given on August 24 to December 9, when it was revised.
This is a long period of time over which the shares were bought from prices above $34 to above $25 prior to the price crash below $13 on the updated guidance. If any theoretical legal action were successful it could result in a huge bill for losses incurred on share purchases at inflated prices over this extended period.
It's important to note much of the above is speculation on my part, although I think it worth taking into consideration when assessing the immediate outlook for the company.
Are dose sales now falling?
However, if the potential legal problems ahead for the company are not worrying enough, it's actual operational performance should probably be concerning investors more.
On January 9 Sirtex confirmed H1 2017 dose sales actually came in 5.6% up over H1 2016 (5,728) which suggests dose sales for the latest half were around 6,049 using the latest guidance.
This compares to dose sales of 6,203 for H2 2016 according to my calculations when using the 2016 full year total of 11,931, which suggests dose sales are now falling (6,203 to 6,049) on the most important half-on-half measure.
This fact should put into focus some of the hopelessly optimistic share price targets and dose sales growth forecasts given by brokers and analysts at the likes of UBS, where I expect Dr Pangloss may be providing the Sirtex coverage.
There's also the problem of rising costs being set to slaughter earnings and competitive headwinds facing a company with just one product that I have covered in this previous article on the company.
All of this may also partly explain why the CEO was seemingly prepared to throw his career away in order to sell so many shares at prices above $28 that may never be seen again.
Needless to say my personal opinion is that this is a stock to avoid given it's still priced for strong growth with plenty of potential problems ahead over both the short and long term.
