I’ll start by saying that I have always liked Sirtex, but then I am one of those weird guys that find radiopharmaceuticals intriguing. They’re like something out of a Marvel comic and I have wasted far too much of my career playing around with radiopharma, one of the most brutal areas of life sciences to actually make money. When I read Peter Hall’s comments in the SMH, I could only conjure one word – “Respect”. He also looks like something out of a Marvel Comic so that makes it even better.
One of the good guys, of course…
One might be tempted to point the finger at the fickle and nasty ASX retail market for causing the recent spectacular stock plunge. Honestly, watching the last couple of days was almost comical – plenty of punters didn’t even know whether the stock was going up or down, only that there was extreme noise and a lot of panic. Things became a little clearer when Montgomery issued a notice that it had re-purchased a significant stake in the company at half the price. Bargain.
Let me tell you why this is a good company.
1) The fundamentals of the market it is trying to capture are very solid. Plenty of cancers eventually migrate to the liver and in the Asian healthcare arena, hepatocellular carcinoma is rife due to hepatitis B infection, especially in Chinese ethnic populations. There is real blue sky market potential for SIR-Spheres.
2) The manufacturing economics of SIR-Spheres are pretty much infinitely scaleable, remarkable considering that it is a radiopharmaceutical (not always the case), and product distribution can be achieved through regional centralised manufacturing. This means that as the market expands for the product, margins are going to continue to look fairly tasty. This is important because radiopharmaceuticals do tend to experience pricing pressure (price erosion), more so than other therapeutic products.
3) Radiopharmaceuticals generally have excellent “immunity” to loss of patent protection. This is because managing the supply chain is complex and creates a natural barrier to generic competition. This was very well demonstrated by Avista Capital’s spin-out of Lantheus from Bristol-Myers Squibb, which essentially recouped its investment through the (non-protected) Cardiolite product in three years.
4) Sirtex is a $100m+ revenue company with nice growth and healthy margins that, after the current market correction, is trading at about 10x revenue. This is phenomenally cheap for a therapeutic biopharmaceutical company.
The equity has now bounced back a little from its sub-$1Bn market cap, but not by much. It’s still a bargain.
So what went wrong?
The clinical trial that Sirtex did with metastatic colorectal cancer was not a completely stupid trial, if a little bit risky. To expand the indications for the company’s core product, Sirtex needs to understand how treating liver mets impacts survival. In the case of most cancers, it’s not the primary disease or even some of the metastatic lesions that kill the patient, it’s specific organ infiltration. In the case of colorectal cancer patients, many simply die from liver failure. Indeed, liver mets were traditionally considered to be such a turning point in the management of a patient, that there was no point in treating the primary disease (or extra-hepatic mets or met’s outside of the liver) any further. Although the primary end-point of the clinical trial failed, the information that Sirtex obtained – in a statistically robust, rapid and cost-effective way – about SIRT’s ability to control the progression of liver metastases, is extremely useful.
What Sirtex did a lousy job of, was explaining the design thesis of the SIRFLOX clinical study and did an even poorer job of communicating the impact of the preliminary results. However, unlike many of their ASX peers, at least the company deserves brownie points for publishing peer-reviewed clinical research outcomes and attending real conferences like ASCO.
I would like to bet that we have not seen the last of SIR-Spheres in the mCRC setting. I think it would be very interesting to combine SIR-Spheres with an immuno-modulatory drug like a PD-1 inhibitor. Mother nature gave us radiation and it is a great gift – not much is more immunogenic than radioactivity. Given the poor prognosis and rapid failure of late-stage mCRC patients, one could be critical about Sirtex’s decision to even pursue the SIRFLOX study in the first place, but I think the data they gleaned is truly valuable and I look forward to seeing their presentation in Chicago.