Why is the Sirtex Medical Limited share price crashing?

Credit: Sirtex Medical

Shares of biotechnology company, Sirtex Medical Limited (ASX: SRX), have once again fallen sharply today and are now trading below $30 a share – their lowest level since June 2015.

In fact, Sirtex has been one of the few shares that hasn’t participated in the recent market rally and today’s 3.5% fall in the share price takes its year-to-date loss to 26%.

All of this comes on the back of its first half FY16 results that showed net profit after tax (NPAT) increased by 46.9% over the prior corresponding period.

Long term shareholders will without a doubt be used to volatility and wild swings in the share price but some investors must be questioning why the share price is falling so heavily after such a strong profit result.

There are a number of possible reasons behind this including:

  • Decrease in unit sales momentum – Although unit sales of its SIR-Spheres increased by 15.7% in the first half, this was well below the 26% increase it achieved in the first half of FY15. Despite this, management expects unit sales to pick up in the second half and to be at least in line with its five-year compound annual growth rate (CAGR) of 19.7%. Obviously some investors are concerned this guidance will be difficult to achieve considering the softer-than-expected growth in unit sales in the first half.
  • Effect of the appreciating Australian dollar – Over 95% of Sirtex’s revenues are generated in foreign currencies and its first half profits were significantly boosted thanks to a considerably lower Australian dollar. In fact, as the graph below shows, the gain from foreign exchange movements outweighed the gain from the increase in unit sales.
Source: Company Report

Source: Company Report

Since the start of January this year, however, the Australian dollar has appreciated strongly against a number of currencies and this will obviously have a negative impact on Sirtex’s Australian denominated earnings.

  • Operating cash flows worse than expected – Investors would have been expecting to see a comparable surge in Sirtex’s operating cash flows but this was instead flat compared to the previous corresponding period. Management have put this down to higher levels of working capital growth and timing differences and expects cash flows to normalise over the next half.
  • Increased operating expenses – Operating expenses ballooned by 38.3% for the first half as the company ramped up its spending on marketing and staff numbers. While an increase in expenses would be expected for a company growing at such a high level, some investors may be concerned that management will not be able to reign in costs if they continue to balloon out.
  • Awaiting clinical trial results – As experienced by Sirtex shareholders in April of 2015, results from clinical trials can have a major impact on the share price of biotechnology companies. Sirtex currently has a number of clinical trials that are expected to be completed within the next two calendar years and their results could have a large bearing on the company’s future success. Importantly, the SARAH trial, which is expected to be completed this calendar year, focuses on hepatocellular carcinoma (HCC) – a new patient category for Sirtex’s SIR-Sphere technology.

Foolish takeaway

I don’t believe there is a sole reason behind the recent weakness in Sirtex’s share price, but rather the weakness is from a combination of different factors.

Sirtex has been a top performer over many years and continues to deliver strong growth, but it does come with a high level of risk and volatility that investors need to be comfortable with.

At less than $30 a share however, Sirtex is certainly becoming a far more attractive investment opportunity and any further falls will have this stock at the top of my buy list.

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Motley Fool contributor Christopher Georges has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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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