Sirtex Medical Facing Key Catalysts In 2016

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-Further upside potential from clinical trials
-Strong growth dependent on centres recruitment
-Self funding business model
 

By Eva Brocklehurst

Sirtex Medical ((SRX)) has provoked broker attention over past few months as it furthers several trials and studies of its oncology treatments. The company supplies oncology clinics with its SIR-Spheres product, used in selective internal radiation therapy for liver tumours. The company sells its product globally and achieved FY15 sales of $176m.

Initiating coverage with an Overweight rating, Morgan Stanley believes the company's salvage therapy – where other treatments have been ineffective – should sustain its high compound growth and returns and underpin the share price. Further upside may come from successful clinical trials which, in the broker's view, have a better-than-average chance of achieving positive outcomes.

The company is engaged in two trials to expand its market and the broker values these at a combined $15.01, with a 60% probability weighting. The broker's bear case valuation, where the trials are unsuccessful, has a $13.86 price target.

Its bull case, where the FoxFire global study and the SARAH Phase 3 data are positive, results in an 11% and 42% increase to FY18 and FY20 dose sales forecasts respectively. The price target in this instance rises to $56.56. The base case assumes a price target of $38.18. The broker notes the current share price reflects some clinical trial success. SARAH data is expected at the end of 2016.

The company has a number of products in development but SIR-Spheres is currently the only one that is commercially available. The product is approved for treatment metastatic colorectal cancer (mCRC) in the liver by the US FDA. This is where some of the original cancer site in the colon or rectum has broken away and lodged in the liver.

SIR-Spheres is a form of treatment where the radiation is placed inside or next to a part of the body requiring treatment. It destroys cancerous tissue but over a much shorter distance, thus minimising harm to healthy tissue.

The SIR-Spheres product has only entered clinical practice in a meaningful way in the last decade but has revealed benefits in patients with inoperable liver cancer that are unresponsive to other treatments (salvage therapy). Morgan Stanley notes few substitute products exist in this end market, but also that awareness among oncologists is low.

The outcomes of the trials are expected to be key catalysts over the next 24 months. A successful outcome for the Foxfire global studies could mean the inclusion of SIR-Spheres in the first line treatment of mCRC. In Morgan Stanley's estimation, this would expand Sirtex Medical's addressable market from 7.6% to 55.7%.

Morgan Stanley also likes the strong margins and cash flow, with a capital light business model which enables the company to self fund. The broker acknowledges the base business is somewhat dependent on recruitment of treatment centres, particularly in the Americas.

There is a risk that new centre recruitment could be more mature than the broker accounted for, given a lack of transparency around new clinics. The company's closest competitor is BTG, which manufactures a glass microsphere product that also treats liver cancer. Morgan Stanley notes another contender in the same disease markets is DEB-TACE, microspheres loaded with a chemo therapeutic agent.

The SIR-Spheres dose sales grew a compound 20% over the last five years and Morgan Stanley believes such growth can be maintained as new centres come on line and because the salvage therapy market is under-penetrated.

In assessing dose sales in the base business Morgan Stanley estimates that current treatment centres alone could deliver 6.6% growth in FY16. In order to reach management's guidance of 19.7% sales growth, the broker estimates that the company would need to recruit 19% more treatment centres, slightly higher than the growth rate of the past five years.

The broker suspects that as penetration of the market increase, growth is likely to to taper. While the Americas are the largest contributor to dose sales, in order to maintain the base business trajectory over the long term, greater growth needs to come from Europe and the Middle East and the Asia Pacific region.

After the first half results Morgans maintains a view that FY16 dose sales guidance is optimistic, whereas Macquarie is more comfortable with the forecasts, expecting sales to accelerate in the second half.

There are three Buy ratings and one Sell (Morgans) on FNArena's database. The consensus target is $35.67, suggesting 14.8% upside to the last share price. Targets range from $17.60 (Morgans) to $46.90 (UBS).
 

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