roger montgomery - the australian

http://www.theaustralian.com.au/business/wealth/strong-clinical-results-in-cancer-treatment-give-sirtex-confidence-ahead-of-worldwide-trial/story-e6frgac6-1226630277634

Strong clinical results in cancer treatment give Sirtex confidence ahead of worldwide trial

by: Roger Montgomery
From: The Australian
April 27, 2013 12:00AM

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130427 b sirtex

Source: The Australian

SIRTEX Medical Limited (SRX) is an Australian-based oncology healthcare company that researches, manufactures and distributes a small particle liver-cancer treatment called SIR-Spheres.

SIR-Spheres have a shelf life of three days and their core advantage as a treatment is their capacity to apply a high dose of localised radiation to liver tumours without the side effects of most other treatments. The Spheres, which are one-third of the diameter of a strand of hair, are delivered to the liver via the hepatic artery.

Sirtex non-executive chairman Richard Hill and chief executive Gilman Wong have done a great job, and volumes of SIR-Spheres have grown for nine consecutive years. For the year to June this year, we expect 7250 doses to be sold at an average selling price of $13,800 per dose, giving Sirtex a revenue line of $100m. Gross margins exceed 80 per cent.

Over the 2010-2015 period, Sirtex will have invested $60m in clinical studies designed to deliver level-one clinical evidence. While four of the studies are less than 50 per cent penetrated in terms of study size recruitment, SIRFLOX patient recruitment has recently been completed.

A randomised controlled trial of SIR-Spheres microspheres in patients with metastatic colorectal cancer (mCRC) is being conducted by SIRFLOX across 100 leading hospitals globally. The study aims to evaluate whether a first-line treatment strategy of using the current standard-of-care chemotherapy plus SIR-Spheres microspheres is more effective than chemotherapy alone in patients with inoperable liver metastases from primary colorectal (bowel) cancer.

In June last year, the results of a small, 20-patient study were published in the American Journal of Clinical Oncology.

The use of SIR-Spheres in combination with chemotherapy saw tumours that were 60 per cent smaller six to eight months after treatment, compared with patients who received chemotherapy only.

This must have given the board of directors enormous confidence.

They have committed to tripling the company's US manufacturing capacity in Wilmington, Massachusetts, as well as building a new manufacturing facility in Frankfurt, Germany.

Both should be complete by late next year, the same time as the primary results for the SIRFLOX trial are expected.

While Sirtex has been marketing SIR-Spheres microspheres for more than a decade, the crucial question now is whether the treatment, including selective internal radiation therapy (SIRT) will be elevated by clinicians from late-stage (so-called "salvage") patients to a first-line treatment option.

A very impressive piece of analysis from Craig Collie of Macquarie Equities Research, which surveyed about 10 per cent of radiation oncologists globally, is highly supportive of this concept. Collie confirmed that with 1 per cent of the secondary liver cancer treatment market, the opportunities for Sirtex appeared "very underpenetrated".

Last year saw the price of Sirtex Medical Limited nearly triple to $13 a share.

This year the share price has retreated to $10. With 55.8 million shares on issue, Sirtex has a market capitalisation of $558m and, with net cash on hand at December 31 last year of $51m, it has an enterprise value of $507m.

The medium to longer-term aspiration is that strong clinical outcomes from the various trials currently being conducted would lead to improved awareness and greater education among oncologists. If this transition is successful, it is conceivable that the growth and broader penetration of the company's treatments could eventually lead to a potential revenue line of $350m-$400m, maintenance of 80 per cent gross margins, and voila: a net profit of $100m.

There are, however, two parts to an attractive investment. The first is the quality of the business and its prospects. Tick.

The second is the price and, with consensus full-year 2013 net profit forecast at $18m and a prospective PE of 31 times, Sirtex looks far from cheap. Of course, if profits grow to $100m, the prospective PE is less than six times.

The Montgomery Fund is a shareholder of Sirtex Medical. Roger Montgomery is the founder of Montgomery Investment Management and the author of Value.able: How to Value the Best Stocks and Buy Them for Less Than They're Worth, available at www.rogermontgomery.com.