SRX - Sirtex Medical

[Klogg]

I probably would have done the same if I had the funds.

It does seem a little obvious though. It's one of those situations where the rough calculations seem to make it look very cheap indeed. Which in itself, makes me wonder if there's not something going on in the background.

I wondered that too... But it's not like sales growth is negative, nor is the balance sheet risky even in the slightest (the only company I can think of with a decent business and more cash relative to market cap would be UOS)

On balance, the risks are quite low.

 

[Ves]

I wondered that too... But it's not like sales growth is negative, nor is the balance sheet risky even in the slightest (the only company I can think of with a decent business and more cash relative to market cap would be UOS)

On balance, the risks are quite low.

I only parsed the announcement quickly this morning, but I always ask more questions when I see the words 'competition' used by businesses with fairly decent ROE and/or profit margins.

I don't know the industry and treatment regime well enough to know the context and possible meaning of said 'competition' though.

But competition + high marketing expenses is always a combination to watch out for.

 

[JTLP]

It looked like the competition was the big one in all of this. Who knows how many others will come online and stifle growth? Yes it's still moving along but the more players, the more you have to spend to differentiate etc. you can see the cycle and how investment requirements could change.

 

[skc]

Have people lost their minds?
Take out excess cash and you're talking 12times earnings (approx.)

The company is still growing, and a fair chunk of marketing spend is discretionary.

Add this to the ASX shocker list.

When I saw the news I thought this would be a 15-20% fall. Dose sale growth has slowed... I'd be very concerned if dose sales were negative (as it indicates bigger issues), but a slowing growth seems a lot less fatal. Certainly not -50% fatal.

They are investing more in sales effort yet getting weaker dose sales growth... so I'd think again if marketing spend is truely discretionary. There's also the mention of new competition in the market... which signals to me further that some marketing spend is "sustaining" expense.

The market is certainly edgy. There's simply been too many high expectation stocks issuing disappointing updates. It's the hangover from the "negative interest rate, buy-anything-with-any-growth" period we have had in 2016. Although to be frank SRX's valuation wasn't nearly as stratospheric as some of the others.

Remember the old saying that profit warning comes in 3's. This is number 2. So the opening price probably reflects the market pre-empting number 3.

P.S. Now just imagine the spectacular that'd be of a DMP or COH market update.

 

[omac]

Given the competition drug is relatively new, it is impressive to gain that much traction in a few months (cheaper, more effective or more marketing dollars?). Any idea on what the drug is?

 

[Ves]

Given the competition drug is relatively new, it is impressive to gain that much traction in a few months (cheaper, more effective or more marketing dollars?). Any idea on what the drug is?

I'm assuming it's Theraspheres. Not sure if there are others.

 

[omac]

a quick search suggests:

Regorafenib (Bayer)

Lonsurf (aka tipiracil from Taiho)

Approved in 2012 and 2015 respectively but a couple of studies released earlier this year. Add weight to the line in the report about clinicians waiting for OS data from SIRFLOX et al, as if the above two were waiting for study data it shows how quick the clinicians may move.


Edit: more likely to be Cyramza (Eli lilly).

 

[Klogg]

They are investing more in sales effort yet getting weaker dose sales growth... so I'd think again if marketing spend is truely discretionary. There's also the mention of new competition in the market... which signals to me further that some marketing spend is "sustaining" expense.

The market is certainly edgy. There's simply been too many high expectation stocks issuing disappointing updates. It's the hangover from the "negative interest rate, buy-anything-with-any-growth" period we have had in 2016. Although to be frank SRX's valuation wasn't nearly as stratospheric as some of the others.

Remember the old saying that profit warning comes in 3's. This is number 2. So the opening price probably reflects the market pre-empting number 3.

P.S. Now just imagine the spectacular that'd be of a DMP or COH market update.

They are investing more in sales effort yet getting weaker dose sales growth... so I'd think again if marketing spend is truely discretionary.
Good point - it's not guaranteed that management can just cut their marketing by 50% (or any other number for that matter). But dosage growth has slowed before in a half, it's not uncommon (although not by this much in the US). The marketing spend wouldn't track exactly to sales on a half to half basis, but it would over time.


As for competition - SRX said this:
"...increased competition for patients with liver-directed therapies, a new drug approval in salvage metastatic colorectal cancer and restrictions in reimbursement..."

So there's potentially a new drug to provide treatment for metastatic colorectal cancer. I don't know the breakdown (I will attempt to find it), but SIRT can also be used for primary liver cancer. So it's not their entire market. Nevertheless, until I know the split, it could be a significant part of it.

Not sure what they mean by "competition for patients with liver directed therapies"... What would cause increased competition for such patients?

Restrictions in reimbursement is easily understood - but the causes would indicate the duration of these restrictions. More info required.


Appreciate the feedback though - always good to know where I should focus my efforts.


And if DMP released something like this, the world would explode. Trading on ridiculous multiples for a pizza place...

 

[Ves]

And if DMP released something like this, the world would explode. Trading on ridiculous multiples for a pizza place...

It's also a pizza place that needs a distribution/branding license to sell that brand of pizza in a jurisdiction. They're not due for renewal for a while, but imagine if they weren't renewed...

I made a post in the DMP about this issue at one point.

 

[McLovin]

a quick search suggests:

Regorafenib (Bayer)

Lonsurf (aka tipiracil from Taiho)

Approved in 2012 and 2015 respectively but a couple of studies released earlier this year. Add weight to the line in the report about clinicians waiting for OS data from SIRFLOX et al, as if the above two were waiting for study data it shows how quick the clinicians may move.

It's Lonsurf.

SRX have handled expectations atrociously. The AGM was barely six weeks ago. Given how far into the first half we already were they should not have given such bullish dose sales estimates. It's pretty apparent this info leaked too, given the weakness in the SP of late.

In summary, the salvage market has rapidly become much more competitive, and without OS data SRX is not able to move up the treatment chain. Management also seem to have been blindsided by Lonsurf's entry. It's been approved and for sale for barely 12 months, and has already had a noticeable effect on SRX sales. I'd take any dose sales estimate with a grain of salt, and I would not extrapolate it at all. SRX used to reassure us that if the trials were unsuccessful they'd still have the salvage market. To me, the trial results are now extremely important.

The lower bound of the FY estimate seems to imply dose sales could go backward in the 2H, doesn't it?

 

[McLovin]

I'm assuming it's Theraspheres. Not sure if there are others.

I think if you gave someone radio-emobolization orally you'd probably kill them well before the spheres got to the liver.

 

[Ves]

I think if you gave someone radio-emobolization orally you'd probably kill them well before the spheres got to the liver.

It's probably a good thing I'm not treating patients!!

Thanks for the summary above by the way. Actually helps a lot that you mentioned that it's the 'salvage' market that is where they are getting hit.

I remember at one point a lot of investors were considering the move up the treatment chain was a bonus or cream on the top and the salvage market earnings alone justified the market price. I can see why this has been thrown off the cliff today if that is actually the case. If there are any doubts about the sustainability of the salvage market earnings, which in the past have funded any growth and research, this becomes a bit more speculative IMO.

 

[omac]

It's Lonsurf.

thanks.

geez its gained traction quickly http://www.otsuka.com/en/financial/pdf.php?financial=454

any opinions on the reclassification by NCCN of SIR-spheres to category 2A? or are 2A/2B/3 neither here or there? (within reason)

 

[McLovin]

thanks.

geez its gained traction quickly http://www.otsuka.com/en/financial/pdf.php?financial=454

From what I understand SS are a better drug, but Lonsurf is being used first then several months later SS are used. In the intervening couple of months some patients die and some become too ill to receive SS. The drug has in effect reset the salvage market.

 

[skc]

SRX have handled expectations atrociously. The AGM was barely six weeks ago. Given how far into the first half we already were they should not have given such bullish dose sales estimates.

Absolutely. December profit downgrades are always bad if the AGM was only a few weeks ago. Not to mention the MD sold about 80k shares last month...

It's pretty apparent this info leaked too, given the weakness in the SP of late.

May be. But aren't there public data available on these sort of stuff? Like a rebate schedule or something?

In summary, the salvage market has rapidly become much more competitive, and without OS data SRX is not able to move up the treatment chain. Management also seem to have been blindsided by Lonsurf's entry. It's been approved and for sale for barely 12 months, and has already had a noticeable effect on SRX sales. I'd take any dose sales estimate with a grain of salt, and I would not extrapolate it at all. SRX used to reassure us that if the trials were unsuccessful they'd still have the salvage market. To me, the trial results are now extremely important.

The lower bound of the FY estimate seems to imply dose sales could go backward in the 2H, doesn't it?

FY16 sales = 11,931. H1 5728, H2 6203.

Now FY15 H1 growth of 4-6% = 5957-6072. Fully year range = +5-11% or 12,527 to 13,243. So take the lowest full year number less the highest H1 number get 6,455... so still H2 growth of 4%.

I think the market will take some convincing on the forecast for obvious reason.

 

[Klogg]

The more I read, the more I realise I don't know.
Sold my holding, writing it off as an ill-informed mistake. It was profitable, but that's beside the point.

I'll do more work over the next week or so and act accordingly.

 

[Ves]

The more I read, the more I realise I don't know.
Sold my holding, writing it off as an ill-informed mistake. It was profitable, but that's beside the point.

Well done for admitting that to yourself. I would probably have been in the same boat if I had the ability to act this morning.

 

[McLovin]

Absolutely. December profit downgrades are always bad if the AGM was only a few weeks ago. Not to mention the MD sold about 80k shares last month...

I can smell litigation. It's a very bad look for the CEO to have offloaded a few million dollars of shares after giving upbeat, albeit opaque, guidance and then a few weeks later do a 180 on the outlook. To be honest, the way Gilman Wong has handled this whole thing he should be handing in his resignation.

May be. But aren't there public data available on these sort of stuff? Like a rebate schedule or something?

In the US it's private health that does most of this stuff. I don't think they have such info made public. Could be wrong.

 

[Klogg]

Well done for admitting that to yourself. I would probably have been in the same boat if I had the ability to act this morning.

What's odd about this is I've done it 5 times (see something that looks cheap, buy, then realise I don't know enough), and 4 out of 5 times it has been profitable - talk about luck...

I can smell litigation.

If you listen to the other forum, capital punishment is on the cards.
I can't believe directors were even allowed to trade during that period, given the forecasts provided to the market.

 

[Ves]

What's odd about this is I've done it 5 times (see something that looks cheap, buy, then realise I don't know enough), and 4 out of 5 times it has been profitable - talk about luck...

I've had a similar experience but with stocks I've looked at closely but not purchased have seen big share price growth.

They did look superficially cheap value-wise, but upon looking a bit closer decided that I either didn't understand enough or on a risk-adjusted basis they were more expensive than they looked.

A big part of this is that you don't see the long-tail earnings risk happen in the first few years (sometimes not for decades perhaps).

I think some of it also has a lot to do with something that skc said earlier in regards to the investing climate of the past few years (the bolded part):

There's simply been too many high expectation stocks issuing disappointing updates. It's the hangover from the "negative interest rate, buy-anything-with-any-growth" period we have had in 2016

And also the unwinding of that when the market potentially goes too hard on the downside.

Other than that I'm probably too sceptical at times.

A big part of investing is knowing your own personal discount/hurdle rates. In some cases the market can be seeing the same kinds of things as you, but using a completely different rate for valuation purposes.