Company Overview - Sirtex Medical Limited is an Australia-based global life-sciences company with an approved cancer treatment supplied globally. The Company develops and delivers oncology treatments using small particle technology. The Company's product, SIR-Spheres microspheres, is a targeted radioactive treatment for liver cancer known as Selective Internal Radiation Therapy (SIRT). SIRT is performed using minimally invasive surgical techniques by an interventional radiologist. Approximately 25,000 doses of SIR-Spheres microspheres have been supplied to treat liver cancer patients in over 600 medical centers in over 30 countries. Sirtex has manufacturing capabilities in the United States of America, Singapore and Australia.
Analysis - With the recent announcement by Sirtex Medical (SRX), we have noticed a sudden slump in stock price given the fact that the Company remained unsuccessful in illustrating the statistical significance in progression free survival (PFS) for patients treated with SIR-Spheres and Chemo (SIRT/Chemo) for liver cancer where the cancer had metastasized from the bowel, i.e., for the treatment of the non-resectable metastatic colorectal cancer (mCRC). However, the fact that SIRT/Chemo was successful in meeting the secondary end point and controlling cancer in liver still becomes a point of importance.
This gives a ray of hope for the final result expected in May or June 2015 indicating the possibility of adoption of SIRT/Chemo for first line treatment of liver cancer. The Company has also conveyed that the secondary study end point is important as liver tumors are the dominant site of disease in patients with mCRC and influence survival. Up to 90% of mCRC patients die of liver failure due to local effects of liver tumors. Hence, we look forward to the results of the SIRFLOX trial to be submitted to the American Society of Clinical Oncology to be held in May 2015 and this will serve as a platform for verification of the results and validation thereof. The detailed data about p-value and hazard ratio will be provided as essential metric to measure the clinical significance. With lower hazard ratio, improvement will be larger in PFS of SIR-SPHERES and Chemotherapy versus Chemotherapy alone.
1H FY15 Dose Sales (Source – Company Reports)
We do note some level of discomfort with the potential that SRX may possess in the medium term. The last announcement with regard to completion of patient recruitment in the SARAH randomized controlled clinical study directly comparing the SIR-Spheres Y-90 resin microspheres versus the standard-of-care systemic therapy sorafenib in patients with non-resectable advanced hepatocellular carcinoma (primary liver cancer) came with a bang though. However, the impact from the results for secondary end point does indicate some prospect and market expansion may occur to some degree. More accurate assessment can be made with the disclosure of full research. In a way, we do not think that the failure will adversely affect the primary demand for the treatment. Other data including the clinical effectiveness is expected to be unveiled at the industry conference scheduled in late May 2015.
Five Year Summary (Source – Company Reports)
The revenues of the Company have been growing at 20-25% annually given the demand for salvage therapy and the trend is expected to continue in future as well owing to the lack of any alternative therapies. It also appears that this trial has been one of the five trials that SRX is performing and thus the growth trend is unlikely to be impacted given the current results. Further, based on a loco-regional treatment, the result looks encouraging given the statistically significant positive effect in the liver. This is thus indicative of positive results for the trials in primary liver cancer. The results of PFS for the liver are likely to reduce the overall risk given the revision in the potential market. This may help increase the validation prospect for the studies. The recent slump in share price appears to thus reflect the actual case which may have been taken as few misinterpretations by the market quite early-on. The announcement with regard to primary end-point may have given rise to a high level of confusion resulting in the current market turbulence. The positives around secondary end-points still hold good. The impact is to be seen with regards to the data for SIR-spheres being used in combination with existing chemotherapy based on the SIRFLOX and FOXFIRE studies which was otherwise expected to be available in CY17.
Financial Results (Source – Company Reports)
The Company has been able to achieve constant currency revenue growth of 36% in the America; 27% in Europe, Middle East and Africa (EMEA); and 15% in Asia-Pacific. The safety and efficacy of SIR-Spheres has steered the demand growth along with pricing outcomes for salvage therapy in general. The foreign exchange outlook has also been favorable supporting earnings and dividend flows. SRX’s 1H15 revenue from sale of goods has been reported to be $80.5 million which is 37.3% up on prior corresponding year and an interim profit of $17.7 million. The Company also reported 58% growth in profit which was at least 30% ahead of consensus. Primarily, the NPAT rose 58.1% to $17.7 million. Further, dose sales of SIR microspheres was on track to exceed 10,000 units for the fiscal year and dose sales rose by 26% in 1H15. Specifically, SRX reported that global dose sales went up 26.3% to 4,950 units. The compound annual growth rate remains at better than 20%. Cash flow from operating activities surged 38.1% to $21.9 million. The Company announced a fully franked dividend of 14 cents per share. The solid financial performance along with growth in global demand for SIR-Spheres targeted radiotherapy treatment for inoperable liver cancer have been the catalyst for the Company’s growth, though the recent partial setback of trial failure may have some implications.
As per the region-wise results, Americas depicted a dose sales of 3,390 indicating a 28% rise with revenue growth 36.7% (in US dollars) compared to previous corresponding period. The sales benefitted from solid reimbursement for SIR-Spheres microspheres in the US market, treating-hospitals footprint expansion and investment into US medical oncologist referral community. EMEA reported dose sales of 1,120 with a 28.1% increase as opposed to prior corresponding year. The revenue growth was 27.2% (in Euro). Restoration of UK market funding for SIR-Spheres was the key catalyst for dose sales growth. Asia Pacific also achieved dose sales of 440 representing 10.8% rise as compared to prior corresponding period. The revenues grew by 14.7%. Growth in Australian market, and sales mix benefits with price increase helped the results.
Sales Revenue (Source – Company Reports)
Efforts towards the new product development indicates SRX’s focus on innovation and development of a portfolio of new products for commercialization. The new technologies such as the carbon cage nanoparticles, coated nanoparticles, radio-protector etc. are expected to provide an edge to the Company for a solid progress. The Company has also conveyed that its business outlook in all markets will remain optimistic and medical need for liver cancer therapy would be to its advantage. The 2020Vision for exploring potential opportunities will be on priority. About $55.5 million in cash and high cash conversion capability makes the Company to be prepared for strong dividend growth and capital management initiatives. The Company may need to emphasize on managing its balance sheet while plummeting the weighted average cost of capital.
SRX Chart (Source - Company Reports)
Based on the foregoing, we put a BUY recommendation for the stock at the current price of $20.84.
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