50c - Best I could do. Sirtex Medical Limited Base case is low...

50c - Best I could do.

Sirtex Medical Limited Base case is low risk; how underlying earnings & DCF are not dependent upon clinical trial success

UBS earnings growth outlook & FCF is not tied to clinical trial outcomes At CY17 SRX enters a pivotal phase of clinical trial data release. Given low probability of forecasting trial outcomes; UBS forward estimates do not consider trial success or failure. UBSe near-term earnings outlook relies upon a 'base case' where potential addressable market (salvage & non-resectable liver dominant mCRC market) is ~400k SIRT (SIR-Spheres Y-90) microsphere doses annually, yet currently ~3% penetrated.
Trial failure will not disrupt UBSe; success will influence sentiment and perpetuity growth rates, but we flag practical limitations as capping FCF & DCF expansion. Using FCF from our base case implies a DCF of $39ps; with SRX expected return of 30% to UBS PT.
UBS launches SRX Thesis Map – pivotal questions
Q1. Is >15% sales growth till 2020E dependent on trial success? No. UBSe current growth forecasts can be achieved within the available label/market & imply growth below SRX's ~20% 5yr trailing CAGR.
Q2. Can clinical trial success increase UBSe dose sales growth >500bps within the next 5yrs? Yes. Positive data (& dependent upon strength of the clinical outcomes), we expect graduated gains in utilisation at existing sites, followed by expansion of reimbursement and investment in capacity (sales, sites etc).
Q3: Can competing products reduce UBSe dose sales >500bps within 3 years? Yes, extremely positive data from competing drugs could impact, though it's likely SIRT could continue as a complimentary product or salvage market likely to be less affected.
Clinical trial success offers upside; impact of failure more moderate/sentiment? Key trial data from SARAH (HCC or primary liver cancer), and FOXFIRE is due 2017; there is a low probability that market analysts can call the trial outcome; but should the trials fail to meet endpoints, we see limited downside risk to UBSe which rely on existing indications. With positive results we would see longer-term upside to current estimates; noting realisation of FCF should be somewhat constrained by practical limitations around expansion (ie. capacity, reimbursement).
Valuation: $39, Buy rating unchanged Trial failure or success will translate as either neutral or positive to longer-term estimates, with limited near-term bearing on FCF, though success will influence perpetuity growth rates in UBS DCF.

UBSe rely upon current addressable market (salvage & non-resectable liver dominant mCRC). There is a low probability of forecasting trial outcomes; but should the trials fail to meet endpoints, we see limited downside risk to UBSe which rely on existing indications. A positive trial outcome (including positive subgroup data) would still confront practical limitations, capping FCF & DCF expansion.

Our penetration analysis suggests that SRX near-term value should hold consistent regardless of the outcome of key clinical trials, as earnings forecasts and FCF rely on current addressable market which remains underpenetrated even into the longer term.
WHAT'S PRICED IN? SRX trades 23% below our DCF which uses FCF from base case to build upon existing clinical indications. Current stock price implies 65% of the stock value from earnings beyond FY19E. UBS FCF forecast SRX can maintain dose sale growth >17% CAGR till FY21E in existing markets, with reversion to 4.75% terminal revenue growth beyond our forecast period.