Down 62% in a year, are Sirtex Medical Limited shares too cheap to ignore?

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.

Sirtex too risky? Here are 3 growing businesses with attractive dividends that could be a suitable alternative:

Top 3 ASX Blue Chips To Buy In 2017

For many, blue chip stocks means stability, profitability and regular dividends, often fully franked..

But knowing which blue chips to buy, and when, can be fraught with danger.

The Motley Fool's in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool's Top 3 Blue Chip Stocks for 2017."

Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

If you're expecting to see the likes of Commonwealth Bank, Telstra and Wesfarmers shares on this list, you'll be sorely disappointed. Not only are their dividends growing at a snail's pace, their profits are under pressure too due to the increasing competitive environment.

The contrast to these "new breed" blue chips couldn't be greater... especially the very real prospect of significant share price gains, something that's looking less likely from the usual blue chip suspects.

The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand - and how quickly the share prices of these companies moves - we may be forced to remove this report.

Click here to claim your free report.

Motley Fool contributor Sean O'Neill owns shares of Sirtex Medical Limited. 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.