The Sirtex Medical Limited (ASX: SRX) share price jumped 16% to $18.10 after an earnings update this morning. Although dose sales of the company's SIR Y-90 microspheres (its main product) were flat, earnings before interest, tax, depreciation, and amortisation (EBITDA) are expected to be approximately $34 million for the first half of the year which ended 31 December 2017.
On a full-year basis, Sirtex expects to report EBITDA between $75 million and $85 million, compared to an underlying EBITDA of $61.5 million that was reported in the 2017 financial year. Dose sales (revenue) are also expected to improve in the second half.
While a positive update, this increase in earnings basically just reflects the fact that Sirtex has cut its research & development (R&D) activity to zero to focus on selling its SIR-Spheres. Earnings improved markedly as a result of lower staff expense and R&D costs.
Lower costs obviously leads to higher earnings, but dose sales were flat and it is yet to be seen if Sirtex can continue growing its SIR-Spheres sales, or reinvest earnings productively in new lines of business. Both are part of the new CEO's plan for the business, but it is early days yet.
At a price of $18, Sirtex has ~55.8 million shares on issue and approximately $50 million in cash, giving it an enterprise value (EV) of ~$950 million. Assuming EBITDA comes in at the bottom end of guidance, $75 million, this prices the company on an EV/EBITDA ratio of 13x, which is not overly expensive for a healthcare business.
I think Sirtex shares are reasonable value today, and I continue to hold my shares, however I think there is substantial uncertainty regarding the company's strategy. For example, will it make smart acquisitions that will increase in value? Can it continue to grow sales even without R&D? Will it be outcompeted by others in the market? These questions are hard to answer and as a result I would be inclined to call Sirtex a 'Hold' today.
