Shares in Sirtex Medical Limited (ASX: SRX) had a short-lived rebound last week following their near 50% intraday plunge on December 9.
Shares in the biotech outfit crashed after management provided a trading update on global dose sales growth, leaving investors seemingly nervous that Sirtex could become another Acrux Limited (ASX: ACR) and destroy shareholder wealth.
Nevertheless, I believe investors should continue to hold their shares for the following reasons.
Trading update
The December trading update indicates management is expecting dose sales growth to slow to 4%-6% for the first half, down materially from its blockbuster 15.7% growth achieved in the prior corresponding period.
Full year earnings on a constant currency basis (EBITDA) is expected to be $65 million to $74 million, representing a decline of 12% to no growth on prior year. Worldwide dose sales growth for the full year is expected to be in the order of 5%-11%, down from 16.4% achieved in the prior year.
Although this is a significant cause for concern, Sirtex's management believes the slowdown in dose sales growth is attributable to its underwhelming SIRFLOX study results. Sirtex has experienced an ongoing decrease in the interventional oncology and referral market in its biggest operating country – America – but believes its three current clinical studies could reassure practitioners of the benefits of using its SIR-spheres.
Broker ratings
Following the earnings downgrade, investment banks have been quick to update their recommendations producing divisive opinions.
Stockbroking firm APP Securities and founder of Hunter Hall Investments – Peter Hall – were quick to rate the stock a buy following the sell-off. Meanwhile, Wilsons HTM and Lodge Partners continue to shun the company, downgrading to hold (from buy) and sell respectively.
Whilst none of these recommendations signify the true prospects of the company, it's safe to presume that Sirtex's fortunes are not set in stone following the latest update.
Instead, investors must look past all the short-term noise and assess Sirtex's business on its individual merits.
Growth prospects
Whilst a possible 12% drop to earnings is material, I believe the near 45% plunge in share price since the start of December is an over-reaction based on current news.
Investors must remember that Sirtex is an established global life sciences business that develops and delivers effective oncology treatment to late stage liver cancer patients. This has been clinically proven.
Furthermore, the company is still growing dose sales globally (albeit at a slower rate), and penetration of Sirtex's potential market is still very low.
Accordingly, although I'll be wary of the company's prospects from here on out, I'd imagine the downside scenario is fully priced into its shares at current prices and therefore recommend holding for any potential upside in the future.
Foolish takeaway
Investors must remember that Sirtex is ultimately a biotechnology company, meaning its share price is subject to wild swings on market upgrades and downgrades.
Even proven stalwarts CSL Limited (ASX: CSL) and Cochlear Limited (ASX: COH) experience major sell-offs from time-to-time, but so far, the latter two have proven resilient and bounced back.
Although Sirtex is riskier than CSL and Cochlear, investors should not take management's trading update as a reason to sell in my opinion. Instead, I believe investors should hold their position and monitor the company closely for developments.
