Sirtex Shifts Focus

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Setting aside the disappointment that has abounded regarding a succession of of clinical trials and studies which failed to produce results the market was expecting, Sirtex Medical has shifted focus.

-New competitive treatments could pressure the use of SIR-Spheres
-PD-1 receptor inhibitors the new competitive treatments to be watched
-Publication of clinical trial data needed to support ongoing use of SIR-Spheres in the salvage setting
 

By Eva Brocklehurst

Setting aside the disappointment that has abounded regarding a succession of clinical trials and studies that failed to produce the results the market was expecting, Sirtex Medical ((SRX)) has shifted focus.

The company is using positive secondary data to apply for marketing approval with the US Food and Drug Administration for use of SIR-Spheres in advanced hepatocellular carcinoma (HCC), due to be submitted in the first half of FY18.

Two thirds of SIR-Spheres dose sales are generated from HCC and metastatic colorectal cancer (mCRC). Morgans observes the latest data has shown SIR-Spheres has a mixed impact on quality of life versus chemotherapy, but remains modestly cost-effective for advanced HCC patients in the UK.

Morgan Stanley suggests material reductions to costs should provide an earnings uplift in FY18, and while the SARAH and FOXFIRE studies failed to meet primary end-points, there is enough in secondary indications to support growth in the base business.

Competition

New systemic agents are poised to change the HCC landscape and likely to pressure the use of SIR-Spheres, Morgans asserts. Multi-kinase inhibitors Stivarga and Lenvima have shown adequate benefit and manageable safety profiles and may become the new standards of care for patients failing and/or intolerant to first-line therapy (in the case of Stivarga) and as a front-line treatment option (in the case of Lenvima).

Morgans believes programmed cell death protein 1 (PD-1) checkpoint receptor inhibitor, Opdivo, stands to become a backbone therapy. Keytruda, another PD-1 receptor inhibitor, should also be watched, in the broker's opinion.

What does this mean for SIR-Spheres? Morgans suggests intensifying competition, ongoing legal battles and no specifics around a viable go-forward strategy limits the upside for Sirtex Medical and downgrades the stock to Hold from Add.

Morgan Stanley's view is that clinical practice has not fundamentally changed over the past 12 months, despite the recent influx of clinical trial data. A more intense competitive dynamic has evolved and this may be the cause for disappointing US growth in FY17.

UBS is of a similar view, although concedes that investors would have been frustrated with the miss on operating earnings at the FY17 results. At around 80% of global revenue, the slowdown in the Americas is a focal point, the broker also acknowledges, with the company calling out heightened competition for patients and tighter reimbursement.

Asia Pacific remains the strongest performing geography, with 20% sales growth in Asia and 9.8% growth in treatment sites across the region.

Outlook

Morgan Stanley suggests publication of clinical trial data is necessary to support ongoing use of SIR-Spheres in the salvage setting and increasingly important for the outlook.

Among the options the broker canvases, data generated by the SARAH in HCC could elevate SIR-Spheres above competitor Theraspheres and restore overall US market growth, as well as stimulate reimbursement approvals across Europe. However, given the timelines for filing, the broker does not expect this to occur until the first half of FY19 at the earliest.

Morgan Stanley believes a return to double digit growth over time from a renewed commercial focus is a realistic expectation but accepts that rectifying the US business will take time. Cost savings should largely net off ongoing sluggish dose sales growth and a headwind from in the Australian dollar in FY19.

The broker still envisages value in the stock, given the high returns on equity, mid-teens growth in earnings per share and an undemanding valuation compared with Australian medical technology peers. FNArena's database has one Hold (Morgans) and two Buy ratings. The consensus target is $19.78, suggesting 25.4% upside to the last share price. Targets range from $16.53 (Morgans) to $24.80 (UBS).
 

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