Research Sirtex Medical Ltd Buy Price: A$16.32 Price Target: A$20.50 ASX: SRX 21 April 2017 Sirtex Medical (SRX) is a global medical device company which targets cancer therapies, with its lead product SIR-Spheres. The recent share price depreciation offers investors an attractive risk/reward proposition at current valuation, in our view. The Company has spent approximately A$60m into five major clinical trials over the past five years, all which are now approaching their completion. The purpose of the studies is to determine the efficacy of SIR-Spheres as a first-line of treatment for liver cancer rather than being used as a salvage treatment (that is, used only after other preferred/standard treatments fail such as surgery/chemotherapy). Our view is the current valuation is ascribing little to no value to potentially positive data results from these studies. Given SRX is already a profitable company (>$200m in revenue and >A$50m in NPAT), the potential growth in SRX s existing revenue lines alone justifies current valuation. Hence, at these levels investors are essentially getting any upside from these data results as a free option, in our view. SRX is due to release the results of one of its clinical trials SARAH on 22 April in Amsterdam. SRX is trading on a 12-month forward blended PE-multiple of 15.5x, which is 44% below its six-year average, whilst offering an attractive growth profile. SRX s key product SRX-Spheres. SRX main product SIR-Spheres microspheres are used to deliver targeted internal radiation therapy directly to liver tumours via the hepatic artery, a short blood vessel that supply oxygenated blood to the liver. This therapy is referred to as Selective Internal Radiation Therapy (SIRT) and is performed using minimally invasive techniques by interventional radiologists. SIR-Spheres are tiny radioactive polymer spheres that emit cancer-killing radiation yet minimize damage to surrounding healthy tissue. SIR-Spheres microspheres are currently used in primary liver cancer (hepatocellular carcinoma) and secondary liver cancer (metastatic liver cancer). SIR-Spheres achieved FDA-approval in 2002 for the treatment of metastatic colorectal cancer (mcrc) a type of cancer which spreads to other parts of the body via blood after cancer cells break from a colorectal tumour (cancer of the colon or rectum). When does SRX treatment come in? Surgery to have the cancer removed is the only cure, however approximately 85% of mcrc patients are unable to have surgery. Therefore, they start chemotherapy (the standard treatment). Patients who do not respond to chemotherapy (that is the disease continues to advance), then seek salvage treatments (e.g. less proven treatments like SIRT / drugs in clinical trials etc). Clinical trial pipeline to expand addressable market. SRX is looking to expand the use of SIR-Spheres and over a five-year period has spent A$60m into 5 major post marketing randomized clinical trials, which are nearing completion. The studies are designed to demonstrate the efficacy of SIR-Spheres microspheres as a first-line treatment for liver cancer either in combination with, or against the current standard of care chemotherapy. If the Company can achieve this it would significantly increase its addressable market. SARAH. Hepatocellular carcinoma (HCC) is the most common form of liver cancer. Sirtex s SIRveNIB (Asia Pacific) and SARAH (France) studies are multi-centre randomized controlled trials (RCT) using SIR-Spheres microspheres versus the approved drug sorafenib (Nexavar) in advanced HCC. On 22 April, SRX will report the results of the SARAH study in Amsterdam. A clinically meaningful improvement over sorafenib could be a positive catalyst for SRX share price as it would increase SRX s addressable market. Our valuation sees +26% upside to current share price. We have set out price target using three methodologies DCF (A$21.53), PE-multiple (A$20.29) and EV / EBITDA (A$19.71). For our DCF valuation we forecast cash flows out to 2021 and use a WACC of 9.5% (long-term growth rate of 2.5%, risk-free rate of 4% and equity risk premium of 5.5%). Our multiple valuations are based on the average of SRX s trading multiples and its key global competitor BTG Plc, listed on the London Stock Exchange.
Investment Thesis We rate SRX as a BUY for the following reasons: Attractive valuation relative to domestic and global peers post recent share price decline. Positive data results from SARAH (due on the 22 nd April 2017 in Amsterdam) and FOXFIRE. We believe SRX current share price is factoring in minimal value from future growth options (that is, positive outcomes from recent studies). Significant market opportunity, given an under-penetrated market. Proposed A$30m share buyback still come (expected in June 2017). Leverage to a falling AUD/USD. Key Risks We see the following key risks to our investment thesis: Adverse implications / results from clinical trial studies. Unable to grow treatment centre footprint. Limited to one key product at the moment. Competitive pressure - loss of market share in key markets. Improved or better alternative treatment. Execution risk. Value destructive acquisition. A stronger AUD / USD. Company Description Sirtex Medical (SRX) is a global life-sciences company that develops and delivers effective oncology treatments using novel small particle technology. The Company s current lead product is a targeted radiation therapy for liver cancer called SIR- Spheres Y-90 resin microspheres. The company has supplied over 73,000 doses to treat patients with liver cancer at 1,060 medical centres in over 40 countries. The Company has manufacturing and logistics operations in the US, Germany and Singapore.
Quick Company Primer SRX is a global healthcare company providing radiation therapy for liver cancer. Main product SIR-Spheres Y-90 resin microspheres. SRX s main product SIR- Spheres microspheres are used to deliver targeted internal radiation therapy directly to liver tumours via the hepatic artery, a short blood vessel that supply oxygenated blood to the liver. This therapy is referred to as Selective Internal Radiation Therapy (SIRT) and is performed using minimally invasive techniques by interventional radiologists. SIR-Spheres are tiny radioactive polymer spheres that emit cancerkilling radiation yet minimize damage to surrounding healthy tissue. SIR-Spheres microspheres are currently used in primary liver cancer (hepatocellular carcinoma) and secondary liver cancer (metastatic liver cancer), where the liver tumour has originated from cancer in another part of the body. SIR-Spheres achieved FDAapproval in 2002 for the treatment of metastatic colorectal cancer (mcrc) a type of cancer which spreads to other parts of the body via blood after cancer cells break from a colorectal tumour. When is it used? Surgery to have the cancer removed is the only cure, however approximately 85% of mcrc patients are unable to have surgery. Therefore, they start chemotherapy (the standard treatment). Patients who do not respond to chemotherapy (that is the disease continues to advance), then seek salvage treatments (e.g. less proven treatments like SIRT). Clinical trials pipeline. SRX is looking to expand the use of SIR-Spheres and over a five-year period has spent A$60m in 5 major post marketing randomized clinical trials, which are nearing completion. The studies are designed to demonstrate the efficacy of SIR-Spheres microspheres as a first-line treatment for liver cancer either in combination with, or against the current standard of care chemotherapy. If the Company can achieve this it would significantly increase its addressable market. Figure 1: SRX clinical trials Source: Company Metastatic colorectal cancer (mcrc). SRX reported the major findings of the SIRFLOX study at the ASCO Annual Meeting in Chicago in May 2015. Patients treated with SIR-Spheres microspheres saw an additional 7.9 months or 62.7% improvement in Progression-Free Survival (PFS) in their lives versus chemotherapy alone and a 31% reduction in the risk of progression, which was highly significant and clinically meaningful. SIR-Spheres microspheres tripled the complete response rate, where no evidence of disease in the liver could be detected, to 6% of all patients. Overall Survival (OS) data from SIRFLOX will be combined with OS data from the FOXFIRE and FOXFIRE Global studies, representing over 1,100 patients.
Hepatocellular carcinoma (HCC). HCC is the most common form of liver cancer and most commonly occurs in people with liver disease (especially people with chronic hepatitis B and C). Sirtex s SIRveNIB (Asia Pacific) and SARAH (France) studies are multi-centre randomized controlled trials using SIR-Spheres mircospheres versus the approved drug sorafenib (Nexavar) in locally advanced HCC. SORAMIC (pan European) is a multi-centre randomized controlled trial using SIR-Spheres microspheres in combination with sorafenib versus soranfenib alone. SRX impressive 5-yr growth profile. As at FY16 results, SRX dose sales (that is number of units sold) were 11,931, representing 5-year compound annual growth rate (CAGR) of +19.1%. Group revenue was A$232.5m in FY16, representing 26.9% CAGR over a 5-yr period. The Americas is SRX s largest market, making up 71% units sold and 80% of group revenue. The remaining component is made up of: Europe, Middle East, Africa (units sold 21%; revenue 18%) and Asia Pacific (units sold 8%; revenue 2%). SRX Relative Valuation PE-multiple valuation. Relative to its historical trading average SRX forward PEmultiple is trading at a 44% discount. Figure 2: SRX PE-multiple chart Current PE 15.5x versus average 27.6x 60.0x 50.0x 40.0x 30.0x 20.0x 10.0x 0.0x Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 SRX 12-mth PE-Multiple (Blended) Average Source: BTIG, Bloomberg
Valuation versus global & domestic comparables. SRX is screening attractively versus key competitor BTG and Australian health care peers. While we understand comparing SRX to Australian health care listed companies is not apples for apples, the purpose is to highlight SRX attractiveness to investors seeking health care exposure in the Australian market. Figure 3: SRX relative versus global and domestic healthcare peers Current FWD PE Div Yield EV/EBITDA Price 1-YR 2-YR 1-YR 2-YR 1-YR 2-YR Global Comps SIRTEX MEDICAL LTD 16.32 19.5x 14.8x 1.6% 2.0% 12.7x 9.5x BTG PLC 628.00 28.9x 19.9x 0.0% 0.0% 18.4x 12.9x Average 24.2x 17.3x 0.8% 1.0% 15.6x 11.2x SRX versus Group Average -19.3% -14.7% -18.2% -15.2% Australian Healthcare Comps SIRTEX MEDICAL LTD 16.32 19.5x 14.8x 1.6% 2.0% 12.7x 9.5x ANSELL LTD 23.35 16.6x 15.8x 2.5% 2.6% 11.1x 10.2x COCHLEAR LTD 138.57 35.8x 32.1x 2.0% 2.2% 23.3x 20.8x CSL LTD 127.94 32.1x 26.4x 1.5% 1.7% 22.0x 19.0x HEALTHSCOPE LTD 2.22 20.7x 19.3x 3.3% 3.5% 12.7x 12.3x RAMSAY HEALTH CARE LTD 70.00 26.7x 23.9x 1.9% 2.2% 12.8x 11.8x PRIMARY HEALTH CARE LTD 3.40 18.9x 16.9x 3.3% 3.8% 8.1x 7.6x SONIC HEALTHCARE LTD 21.52 20.0x 18.0x 3.5% 3.9% 12.8x 11.6x RESMED INC-CDI 9.21 25.3x 22.3x 2.1% 2.3% 17.0x 15.1x FISHER & PAYKEL HEALTHCARE C 9.02 32.4x 27.2x 2.1% 2.5% 19.8x 16.9x VIRTUS HEALTH LTD 5.77 15.2x 13.5x 4.8% 5.2% 9.4x 8.5x MONASH IVF GROUP LTD 2.01 15.6x 14.6x 4.5% 4.7% 10.8x 10.0x Average 23.2x 20.4x 2.8% 3.0% 14.4x 12.8x SRX versus Group Average -15.9% -27.5% -41.9% -33.6% -11.4% -25.7% Source: BTIG, Bloomberg Figure 4: SRX Financial Summary
Year-end June ($ millions) PROFIT & LOSS (P&L) FY14A FY15A FY16A FY17E FY18E FY19E Revenue 129.4 176.1 232.5 242.9 287.6 312.1 Operating Expenses 98.6 124.7 160.1 176.8 200.7 212.4 EBITDA 30.8 51.4 72.4 66.2 86.9 99.7 % Margin 23.8% 29.2% 31.2% 27.2% 30.2% 31.9% Depreciation & Amortisation 1.6 2.4 6.6 5.8 4.4 4.3 EBIT 29.2 49.0 65.9 60.4 82.5 95.4 % Margin 22.6% 27.8% 28.3% 24.9% 28.7% 30.6% NPAT 23.9 40.3 53.6 48.0 62.7 71.9 Underlying NPAT 23.9 40.3 53.6 48.0 62.7 71.9 Underlying EPS (cps) 0.43 0.71 0.94 0.84 1.10 1.26 DPS (cps) 0.20 0.30 0.27 0.34 0.42 Growth Rates: Revenue 36.1% 32.0% 4.5% 18.4% 8.5% EBIT 67.9% 34.4% -8.3% 36.7% 15.6% Underlying NPAT 69.0% 32.8% -10.5% 30.7% 14.7% VALUATION FY14A FY15A FY16A FY17E FY18E FY19E PE multiple (x) 39.7 40.7 27.3 19.0 14.4 12.5 P/B ratio (x) 8.8 11.4 7.6 4.3 3.6 3.0 Dividend Yield (%) 2.5 2.5 2.5 1.6 2.1 2.6 EV/Sales (x) 6.9 8.9 5.8 3.4 2.8 2.6 EV/EBIT (x) 28.0 16.7 12.4 13.6 9.7 8.0 BALANCE SHEET SUMMARY FY11A FY12A FY13A FY14A FY15A FY16A Cash 42.9 49.4 52.1 52.5 73.9 107.0 Current Receivables 12.8 15.3 19.1 23.5 33.2 39.9 Current Inventories 1.0 0.9 1.7 1.7 1.8 1.9 Property, Plant & Equipment 6.8 6.6 9.1 13.6 13.2 14.0 Other 13.1 24.4 35.7 57.5 79.3 98.9 Total Assets 76.6 96.7 117.8 148.7 201.5 261.7 Current Payables 6.1 5.3 6.6 7.6 13.6 16.3 Total Debt 0.0 0.0 0.0 0.0 0.0 0.0 Other Liabilities 10.4 17.9 23.1 33.5 43.2 51.9 Total Liabilities 16.5 23.1 29.6 41.1 56.8 68.2 Shareholders Equity 60.1 73.5 88.1 107.6 144.6 193.5 Net Debt / Equity -71.4% -67.2% -59.1% -48.8% -51.1% -55.3% Net Debt / (ND+E) -249.1% -205.2% -144.5% -95.3% -104.6% -123.8% CASH FLOW SUMMARY FY11A FY12A FY13A FY14A FY15A FY16A Net Income 11.5 17.1 18.3 23.9 40.3 53.6 Depn & Amortisation 1.0 1.4 1.4 1.6 2.4 6.6 Other Non-cash Adj. 3.2 2.8 5.3 7.8 6.8 10.8 Changes in Non-cash capital -0.4-1.3-0.6-1.1 2.5-5.7 Operating Cash Flow 15.3 20.0 24.3 32.2 52.0 65.2 Capital Expenditure -3.4-1.1-3.7-6.2-1.7-1.7 Free Cash Flow 11.9 18.9 20.6 26.0 50.3 63.5 Source: BTIG, Company, Bloomberg
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