Sirtex – medical success offers investment opportunity

Founder and Chief Investment Officer of Montgomery Investment Management
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Sirtex Medical Limited (SRX) is perhaps not a business you are familiar with. But we believe it’s a real success story, with bright prospects.

A new treatment

This Australian medical business’s core product is SIR-Spheres, which deliver a highly focused radioactive dose directly to liver cancers (Hepatocellular Carcinoma – HCC).

Approximately 600,000 cases of liver cancer are diagnosed each year, including 19,000 in the US, 54,000 in Europe and 390,000 in China, Korea and Japan.

Chemotherapy has been the gold standard in treatment for many decades, but its combined use with SIR-Spheres is growing.

Whilst it’s early days, it is hoped that the focused nature of the treatment, which delivers a radioactive dose several times the potency of standard chemotherapy, will be enough to shrink cancer tumours to a size at which they can be removed.

Strong growth in sales has lead Sirtex to undertake a Phase 111 trial (now underway) and we expect the results to be announced in early 2015.

Positive trial results may lead to an increase in demand for SIR-Spheres. A number of smaller trials have shown excellent outcomes when compared to the use of chemotherapy alone, and we anticipate that the Phase 111 trial will result in much broader adoption of SIR-Spheres.

Growth focus

Sirtex is currently expanding its sales teams and US and German manufacturing facilities in anticipation of strong, future demand from a growing market, and it is continuing to update shareholders on how dose sales are tracking.

The following statement is from Sirtex’s most recent quarterly disclosure, on 4 October 2013:

“Sirtex Medical Limited (ASX: SRX) today announced sales of its SIR-Spheres® microspheres targeted radiation therapy for liver cancer, grew 4.1 per cent for the quarter ended 30th September 2013 compared to the previous corresponding period. Sirtex has now recorded 37 consecutive quarters of positive growth.”

While we don’t encourage focusing on quarter-to-quarter growth, the update seemed to disappoint and the share price subsequently declined, so for context, let’s compare the past 12 quarterly disclosures.

We suspect the negativity is due to the growth rate being low compared to exceptional historical performance.

Four per cent growth as the new normal would be concerning for the future prospects of SIR-Sphere dose sales, as it may imply the outlook for the business has faded. Is the business’s growth profile as attractive as it once was?

In the same period last year, a record 37% in Dose Sales growth was achieved. The September 2013 quarter numbers were therefore ‘cycling’ off a very high base.

We therefore view the market’s reaction to the recent disclosure as an overreaction at this stage. Perhaps more important to focus on was the following sentence:

“Dose sales increased in the Americas by 6.6% and 10.2% in APAC (Asia Pacific). EMEA (Europe, Middle East and Africa) declined 5.1%.”

While US and APAC growth impressed, EMEA is potentially a very large addressable market for SIR-Spheres, so it’s important to understand what caused the 5.1% contraction.

Funding schemes

One of the key risks to Sirtex’s business model is whether hospitals and practitioners who use SIR-Spheres have access to an adequate level of ‘reimbursement’.

This is a fundamental driver of all medical device use. Should reimbursement ever become unavailable, demand would simply decline.

Across major markets in the UK, US and APAC, there are diverse funding schemes. In the UK, SIR-Spheres were, until recently, captured under the UK Cancer ‘Drug’ Fund reimbursement system.

SIR-Spheres, however, are a device, not a drug. And when this was picked up, it was promptly removed.

For a large portion of the September 2013 quarter, Sirtex’s SIR-Spheres transitioned into a new scheme, ‘Commissioning through Evaluation’ (CtE). This was expected to finish in July, but due to delays in approval, it has been delayed until November 2013.

During this period, reimbursement for the device is effectively in limbo, and this has resulted in a significant reduction in dose sales in the UK, the third largest region in EMEA by dose sales. This is clearly a short-term negative, but, in time, will potentially benefit sales.

Like any growing business, there are likely to be bumps along the way. The road is never smooth, especially in the medical device industry.

Relatively few Aussie inventions have ever improved the quality of lives of patients all over the world. Cochlear’s hearing devices are one example of a product that has. Seeing current Sirtex management in action gives us confidence that, in time, SIR-Spheres will be recognised as another.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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