The price of Sirtex Medical Limited (ASX: SRX) shares has dived 62% in the past 12 months. First, then-CEO Gilman Wong was fired for improperly trading in the lead-up to an earnings downgrade.
Then, Sirtex was handed some unwelcome news with its 2 most recent clinical trials, SARAH and FOXFIRE showing no improvement in overall survival versus the current standards of care, Sorafenib and chemotherapy.
While there was some promising improvement in secondary measures of patient wellbeing during these trials, Sirtex has not shown that its treatment is significantly better than the current standard of care.
So What?
Sirtex' SIR-Spheres treatment is currently a 'salvage' treatment for patients that have failed all other treatment types. If SIR-Spheres had been proven better than existing first line treatments, it could have been used sooner and on more patients (i.e., the total potential market would grow). However, recent results indicate that Sirtex will likely be constrained to its 'salvage' market.
On the plus side, SIR-Spheres were not shown to be worse than existing therapies, and the relative benefits to patient quality of life could see it used more frequently in certain specific situations. However, sales do not appear likely to grow significantly from this opportunity in the near term.
Now What?
The question of the day is whether today's share price is an attractive opportunity for Sirtex in the context of its future opportunity. The business is priced at an estimated 17x full year earnings, and has a strong balance sheet with just under $100 million in cash and no debt. What's more, its treatment unquestionably works in the salvage setting and, despite competition, Sirtex has carved a niche in this sphere.
Dose sales during the first half were 6,047, and full year 2016 sales were 11,931, implying modest growth. The existing market opportunity in mCRC (colorectal cancer) for Sirtex is estimated at 42,000 patients per year, and SIR-Spheres are also used in liver cancer. For HCC (liver cancer), the current opportunity is an estimated 23,000 patients per annum in current markets.
A rule of thumb of 1 dose per patient suggests that Sirtex still has room to grow, although much of the opportunity depends on the company's expansion to new markets and increased regulatory and funding approval for SIR-Spheres, particularly in Asia.
The bottom line
All things considered, you can buy plenty of lower quality companies than Sirtex for a similar price tag, and these other businesses typically carry considerable debt and experience greater competition. It's unclear how much Sirtex can continue to grow in its existing markets, and there is significant uncertainty added by the recent executive departures and a class action against the company. However, Sirtex definitely has room to expand in new markets, and the strong balance sheet brings opportunity for acquisitions or increased R&D expenditure. On balance I believe the company is good value at today's prices, but only for investors with a higher risk tolerance.
