Sirtex Remains A Long-Term Prospect

This story features SIERRA RUTILE HOLDINGS LIMITED. For more info SHARE ANALYSIS: SRX

-Await AGM update on dose sales
-Treatment expansion expected over time
-SIR-Spheres added to 2 new guidelines
 

By Eva Brocklehurst

Sirtex Medical ((SRX)) is making progress with sales of its liver cancer treatment, revealing a 69% increase in net profit in FY15 which beat expectations. Volume growth in terms of doses rose 20%, in line with historical averages. Investment in manufacturing is now complete and the company has tripled its capability on that front.

Despite the lack of level 1 clinical data on the benefits of SIR-Spheres for the treatment of metastatic colorectal cancer (mCRC), the company has still achieved substantial growth in dose volumes in terms of its liver-directed treatment. Views on the timing around elevating SIR-Spheres further up the chain in standard of care have been extended to 2017, once overall survival data has been released as part of the global FOXFIRE study.

The last year has been critical for the company, with a series of important outcomes from its clinical trial programs. Bell Potter notes clinical opinion regarding SIR-Spheres remains divided in the US, with some oncologists refraining from rating the liver-directed therapies in the absence of systemic benefits. For this reason Bell Potter declines to upgrade revenue projections at this point in time. Moelis, too, pushes out its potential earnings uplift to reflect this delay to broader acceptance.

Brokers await the next major update on dose sales at the AGM. A peer review of SIRFLOX will also be published later this year and should provide an important insight into the intentions of key opinion leaders in the US. Bell Potter maintains a Hold rating and $31.71 target while Moelis believes its Buy case is reaffirmed with the financial results and retains a $40.65 target.

Moelis maintains that despite the high trading multiple, the stock is a long-term investment opportunity with significant growth potential. The balance sheet remains strong and cash conversion is 100%. Clinical investment has declined 7.0% as large studies are progressed. Going forward, Moelis anticipates lower investment on an absolute and percentage-of-revenue basis. Amortisation of the $25m capitalised clinical investment balance began in June and this will be undertaken over eight years.

The company will continue to drive a dual marketing and sales strategy, targeting new oncologists and penetrating existing treatment centres. Driving higher doses per centre is an easier way of growing in the near term, as physicians are already familiar with the product. Management remains confident that further analysis of the data will mean the treatment is adopted earlier in the mCRC disease progression.

Macquarie observes further price increases in the company’s key market are likely to be difficult to obtain. Moreover, the trajectory of unit growth has slowed. Growth was 26% in the first half of FY15 versus 14% in the second half. As the SIRFLOX results were presented only in June, Macquarie also awaits the AGM update in October for a unit sales update.

UBS retains a positive outlook on the stock and flags the addition of the product to two new clinical guidelines. To the European Society for Medical Oncology treatment list for mCRC in patients who have failed to respond to available therapy and in the Taiwanese guidelines for the most common type of liver cancer – Hepatocellular carcinoma.

Goldman Sachs also maintains its optimism, expecting dose sales growth to accelerate as SIR-Spheres becomes recognised as a valuable treatment in liver cancer. The broker’s forecast is for a 3-year dose sales compound growth rate of 22% over FY15-18, based on ongoing growth in the last recourse (salvage) option, which is around 30% penetrated, as well as for treatment of other types of liver metastases over time. Goldman Sachs has a Buy rating and $39 target.

Morgans retains a more sceptical prognosis, while acknowledging the solid earnings outcome. While accepting SIR-Spheres clearly works in the liver, the broker expects the results of the SIRFLOX study to have limited impact on driving adoption in a systemic disease such as first-line mCRC. Morgans does not expect treatment guidelines will change, with physicians remaining hesitant to prescribe and payment systems resistant to reimbursement.

FNArena’s database has two Buy ratings, Macquarie & UBS, who both have $40.00 targets. The odd one out is Morgans, which has a Reduce (Sell) rating and a $17.56 target. The consensus target is therefore $32.52, which suggests 1.8% downside to the last share price. This compares with $29.05 ahead of the results.
 

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