Beleaguered cancer treatment company Sirtex Medical Limited (ASX: SRX) released an update on the previously announced legal proceedings to the market this morning.
A copy of the draft statement of claim being made against it was released, as well as a brief announcement from the company.
The person initiating legal action is apparently looking to commence proceedings against Sirtex on behalf of himself "and on behalf of all persons who acquired ordinary shares in the Respondent (Sirtex Medical) on or after 24 August 2016 and who were at the commencement of trading on 9 December 2016 holders of any of those shares."
The draft statement alleges that Sirtex engaged in deceptive conduct that resulted in loss to people who bought shares in Sirtex between 24 August 2016 and 9 December 2016.
The back story
Readers following along at home might recall that 24 August is the date that Sirtex reaffirmed its guidance for 'double digit dose sales growth to continue in FY17'. Chief executive Gilman Wong subsequently sold $2 million worth of shares in October, before the company downgraded its guidance in December. Mr Wong recently had his employment terminated by the Sirtex board after an independent legal investigation found that he had acted improperly.
Now what?
Readers can find more information on the legal proceedings and termination of CEO Wong in the links above. The chief concern for shareholders is now to evaluate the possible impact to Sirtex. The company has acknowledged that the claim against it is 'material' and that also that it would defend the claim vigorously.
I understand this to mean that, if a case was found against them, the impact on Sirtex is financially material – i.e., it would have a meaningful impact on the company's financial position.
Average traded volume for Sirtex shares appears to be around 200,000 shares per day for the 83 trading days between August and December, or ~16.6 million shares. Assuming shares were $28 each and fell to $14 – a $14 loss per share – back of the envelope calculations suggest that the total losses by investors sustained could be up to $232 million. The actual real-life size of the claim is unknown, but likely to be far smaller than this due to the complexities and multiple inputs involved in calculating potential class action claims bills. The above numbers should be for illustrative purposes only.
The three biggest class actions in Australia, according to Shine Lawyers, were SP Ausnet/ Utility Services Group ($500 million) for the Victoria 2009 bushfires, the Big 4 Australian banks (~A$400 million, ongoing) for late fees, and Sigma Pharmaceutical Limited (ASX: SIP) ($57.5 million) in 2012 for deceptive conduct.
It would be ultimately unproductive to spend too much time speculating about the ins and outs of a class action, because there are so many unknowns.
Suffice to say that the worst case scenario is potentially quite material to Sirtex, which currently has a market capitalisation of $800 million. Suffice also to say that class actions can take years to be finalised, either in or out of the courts, and also that the ultimate impact will depend on whether Sirtex chooses to settle, goes to court and is found to be at fault, or goes to court and is exonerated.
The situation is further complicated as the company and/or executives may have insurance cover against litigation that may mitigate some of the financial impact.
Foolish takeaway
Sans legal action and even accounting for the recent downgrade, Sirtex shares look cheap, and the company has no debt and a strong balance sheet. The lawsuit is a big black cloud on the horizon however, with additional concerns regarding international reimbursement and increasing competition.
Sirtex has asked for an extension until mid-February to reply to the letter, and for the time being I suggest watching and waiting from the sidelines. I will not be making a decision about my shares until the company responds to the letter and I can better evaluate the likely outcome/s.
