Important Catalyst Looms For Sirtex Medical

This story features SIERRA RUTILE HOLDINGS LIMITED. For more info SHARE ANALYSIS: SRX

-"Standard of care" potential
-Growth potential outside of study
-Bear case minimal impact
 

By Eva Brocklehurst

Sirtex Medical ((SRX)) has reached a key point, given the potential catalysts over the next few months. Results from its SIRFLOX study are to be announced in late March and Moelis is very optimistic.

There are three recommendations on the FNArena database. UBS and Macquarie are generally cautious ahead of the SIRFLOX study results while Morgans, with a Reduce rating, believes trading levels reflect excessive optimism and, even if the study is positively conclusive, it will be hard to change clinical practice – at least in the short term. The database consensus price target is $23.34, which suggests 21.8% downside to the last share price. Targets range from $14.03 (Morgans) to $28.00 (UBS and Macquarie).

Moelis differs from these brokers substantially, reiterating a Buy rating and raising its target to $36.70, maintaining a view that the results from the SIRFLOX study will be favourable. In fact, the broker is of the belief that given the current market cap weighting to the Small Industrials index and the large growth potential, if the stock is not represented in a portfolio then this is a "bet against it".

In the broker's view, the stock is de-risked compared with other biotech developers because of the nature of its study. In addition, strong growth in doses and faster-than-anticipated recruitment in other trials bodes well. The company has achieved over 40 consecutive quarters of growth in its current form, with only a 2.0% market penetration on Moelis' estimates. Pending favourable results from the SIRFLOX study, SIR-Spheres could be elevated to a first-line treatment. It may even become "standard-of-care", in Moelis' view, which would expand the market size and driving greater market share. Hence, the broker considers this stock compelling as both a near term and longer term investment.

The core to Moelis' valuation is dose growth emanating from an increase in market size and penetration. Assuming margins are maintained the broker factors a relatively modest improvement in its bull case scenario – 10% over the medium term in market penetration. With leverage from scale significant upside becomes possible. The bear case is as overstated as the bull case is understated, as the broker points out that the company expects any unfavourable results from the SIRFLOX study will only have a minimal impact on sales in its existing form as a salvage therapy.

The SIRFLOX study in metastatic colorectal cancer is testing whether a combination of standard chemotherapy and SIR-Spheres is more effective than chemotherapy alone. If this is positive it may provide sufficient evidence for the use of SIR-Spheres as a first choice treatment. Technically, full validation is only achieved after a peer review. Sirtex intends to submit the findings of the study to the American Society of Clinical Oncology in June 2015.

While this is a near-term catalyst, Moelis believes the creation of alternative technologies to diversify earnings over the longer term and reduce the risk of a single product business would be beneficial. The broker notes that Sirtex has received a $50,000 government grant for brain cancer R&D and is believed to be working with researchers from the University of Sydney. Upcoming first half results could boost momentum further, as Moelis expects results to reveal positive momentum in dose sales, price increases and currency benefits.
 

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