SRX - Sirtex Medical

[skc]

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.

I don't know if there's that much of a case on the guidance change.. previous guidance was double digit growth. Mid point of revised guidance was 7.75%. If you take it at face value it's a 2.25% miss or about 250 doses missed.

Wong actually gave a reason for his sale... so if anyone was to investigate it could easily review if any of that was true.

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.

Lonsurf's number were in the public domain as omac found. Poor homework by analysts imo.

thanks.

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

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...

Better lucky than good.

Now where's Craft? A few of his holdings have had a forgettable year.

 

[notting]

If you're in with a Wong something will be wrong

Very wrong-

The company said that soft sales of its treatment doses in the Americas, Europe, the Middle East and Africa meant that worldwide dose sales growth would only be between 4 and 6 per cent in the six months to December 31, compared to 15.7 per cent in the prior corresponding period.

Sirtex said sales growth will be between 5 to 11 per cent in the 12 months to June 30, compared with 16.4 per cent.

Full-year earnings will be flat at $74 million at best, the company said, but could drop by up to 12 per cent.

Ban Wongs

 

[McLovin]

I don't know if there's that much of a case on the guidance change.. previous guidance was double digit growth. Mid point of revised guidance was 7.75%. If you take it at face value it's a 2.25% miss or about 250 doses missed.

Wouldn't the mid-point of "double digit dose sales growth will continue" be 15%? There were no qualifiers to the statement to lead one to think it was going to be at the lower end, and given where growth has been historically, an aticipated 10% growth rate would surely have required some sort of heads up about "low double digit".

Wong actually gave a reason for his sale... so if anyone was to investigate it could easily review if any of that was true.

Sure he may have had a reason, but the timing seems very convenient. SRX has always had pretty good corporate governance, so I'm willing to give them the benefit of the doubt, but it's not a good look at all.

Lonsurf's number were in the public domain as omac found. Poor homework by analysts imo.

Yes, you are right.

 

[craft]

Now where's Craft? A few of his holdings have had a forgettable year.

Toes in the sand, beer in the hand – you would think the market would have more respect for a person’s holiday.

Are you talking about the gifts that just keep giving?

Just a bit of noise. The two companies in my portfolio having a wild ride at the moment are VOC & SRX. I’m comfortable with both. Business is never just up over my time frame.

In respect to SRX. This latest growth forecast is outside of what could be considered statistical noise for the historical growth path. So logic suggest to be very careful here unless you are entirely comfortable enough with your understanding to bet against the market. Without wasting holiday time and elaborating nothing in the update bothers me too much.

Bottom line. If it was me I would want SIR Sphere’s and I would want them very early in the treatment program. Lonsurf is irrelevant in how I would want to fight, but its easy for the oncologist who's just going through the motions. Nothing will shake me from riding this until all the clinical trial outcomes are known. To the moon or bust!

Wong’s reason for selling was to cover tax on shares that had vested – would have to check to see if he only sold enough to cover tax on recently vested shares, but if he did and it’s his regular practice I would have some sympathy for his actions, as selling as close to your deemed purchase price for taxation is a sensible risk mitigation practice when part of your salary comes from equity. If he sold more than required to mitigate tax commitment risk than I’m on the band wagon saying the company is in the w(r)ong hands.

 

[mcgrath111]

I understand wongs reasoning, but something about that jist stinks imo.

 

[McLovin]

Bottom line. If it was me I would want SIR Sphere’s and I would want them very early in the treatment program. Lonsurf is irrelevant in how I would want to fight, but its easy for the oncologist who's just going through the motions. Nothing will shake me from riding this until all the clinical trial outcomes are known. To the moon or bust!

Which is why I'm still holding. Even if OS from SS is only as good as Nexavar, it will likely replace Nexavar given the price difference and patient QoL.

Wong’s reason for selling was to cover tax on shares that had vested – would have to check to see if he only sold enough to cover tax on recently vested shares, but if he did and it’s his regular practice I would have some sympathy for his actions, as selling as close to your deemed purchase price for taxation is a sensible risk mitigation practice when part of your salary comes from equity. If he sold more than required to mitigate tax commitment risk than I’m on the band wagon saying the company is in the w(r)ong hands.

My issue isn't with Wong selling shares – or the reasons for it – it's what the internal outlook for dose sales was at the time of the sale, beyond the vague forecast of "double digit growth continuing". Six weeks later, after he had offloaded his shares, they were able to firm up that forecast not just for the half year, but also the full year. Maybe I'm jumping at shadows, and as I said SRX has a pretty good corp governance record, but it's not a good look at all.

 

[McLovin]

Wong is being investigated by SRX's lawyers, and has stood aside.

Listening to the call what confused me was management were at pains to stress how little visibility they have wrt dose sales, and then in the next breath were giving full year dose sales estimates.

 

[craft]

Wong is being investigated by SRX's lawyers, and has stood aside.

Listening to the call what confused me was management were at pains to stress how little visibility they have wrt dose sales, and then in the next breath were giving full year dose sales estimates.

No way back to confidence in these guys without either daily dose sale released so that the market can make an independent judgement that there's nothing to see here or some pretty wholesale changes in management and board.

If this company didn't have good prospects the price would be even more toast. Very much more a binary investment on trial data due to the current circumstances than if market had faith in Management.

Shame - internally funded growth to date could have been a great legacy - Only very decisive action here has hope of not overshadowing that legacy and we don't seem to be getting it. Last hope is that the investigation is not just a whitewash but a crossing of the T's and dotting of the I's before decisive action.

SRX board/management has a bad hand at the moment - No matter what the truth of the situation around continuous disclosure, inside trading etc. It can not be denied that SRX dealt the hand to themselves. They have to play this bad hand very decisively or fold quickly so as to not permanently damage SRX's prospects.

 

[luutzu]

I'm in.

So far, cannot find anything wrong with this company.

Seems to me the past 16 years could just be its beginning.

 

[McLovin]

Wong has been sacked. The contents of the report by SRX's lawyers are confidential. My reading of the announcement is that he will not be paid from today (date of termination). Does that imply some wrongdoing on his part? Under normal circumstances I would have expected him to either resign or be retrenched with a period of gardening leave. The fact he was terminated would lead me to think the lawyers found something.

I think his position had become untenable within the company, but I'm disappointed it had to end this way for him, especially if he acted in poor judgement. He really built SRX up over the period of his leadership from a small biotech to a legit mid-cap healthcare stock.

 

[skc]

Wong has been sacked. The contents of the report by SRX's lawyers are confidential. My reading of the announcement is that he will not be paid from today (date of termination). Does that imply some wrongdoing on his part? Under normal circumstances I would have expected him to either resign or be retrenched with a period of gardening leave. The fact he was terminated would lead me to think the lawyers found something.

I think his position had become untenable within the company, but I'm disappointed it had to end this way for him, especially if he acted in poor judgement. He really built SRX up over the period of his leadership from a small biotech to a legit mid-cap healthcare stock.

Friday afternoon announcement after close... never a good thing.

You'd have to imply there's some wrongdoing. Remember that Wong actually had the audacity (for want of a better word) to issue a statement after his share sale... may be he acted in poor judgement but to lie in a statement to cover the poor judgement was a further mistake.

What I am also concerned about is how this reflects on SRX's response to ASX on how they forecast sales. On one hand they are saying everything was above board as there is no transparency beyond a short window (no forecast was revised until early Dec), then on the other hand the CEO was able to predict the downgrade 6 weeks beforehand (assuming that's the reason for the share sale).

So if Wong did something wrong by acting on the poor outlook information that should not have existed... then the Board also potentially did something wrong with regards to their ASX response on how quickly they can determine changes in sales and forecasts.

 

[McLovin]

What I am also concerned about is how this reflects on SRX's response to ASX on how they forecast sales. On one hand they are saying everything was above board as there is no transparency beyond a short window (no forecast was revised until early Dec), then on the other hand the CEO was able to predict the downgrade 6 weeks beforehand (assuming that's the reason for the share sale).

Like I said in a post up thread, the downgrade conference call was management stressing they only have near term visibility, then going ahead and making a full year estimate. The visibility thing is arse covering, and the lawyers have evidently seen straight through it, and the deliberate vagueness of the AGM guidance. They've got field reps who would be getting feedback from customers and relaying it. I doubt Gilman was sitting by the fax machine watching new orders roll in and updating his spreadsheet.

So if Wong did something wrong by acting on the poor outlook information that should not have existed... then the Board also potentially did something wrong with regards to their ASX response on how quickly they can determine changes in sales and forecasts.

I don't think it's over yet. The board has to be brought to account, and really needs a bit of rejuvenation. The tenure of the board in years is 12, 11, 1, 14, 11. Time for some new blood me thinks.

 

[DeepState]

Craft, what's the implied growth rate (whatever measure you see as most impt for valuation) impounded into current prices as you see it? Pls.

 

[craft]

Craft, what's the implied growth rate (whatever measure you see as most impt for valuation) impounded into current prices as you see it? Pls.

Most important growth figure is Dose Sales.


I’m not sure reverse engineering a single market implied growth rate out paints the whole picture as this company's future is pretty diverse depending on the outcome of some pretty major trials reporting over the next few years. Probably better having a positive outcome value, a negative outcome value and a probability assigned to both – pretty hard to reverse engineer three variables.


However for the exercise and giving you the assumptions I need to make to isolate dose sales as the implied variable.


Implying rate of scale benefits declines over time from historical. Which is conservative as they have a large current excess manufacturing capacity in place in case of positive trial outcome. Trials expenses are a known upfront expense that will come to an end. Also Nothing has come of R&D spend to date so this assumption also implies that they continue the same level of R&D and nothing ever comes of the investment.


On top of implying no scale benefits, I’ll make the assumption that fixed expenses increase quicker than revenue and brings return on equity down slightly over time.


Implying no other profitable use for the excess cash flow beyond funding the implied growth rate. So payout ratio goes up accordingly.


@ 10% after tax discount rate, A dose growth rate of ~5% would solve my valuation model at current market price.


But once again let me just emphasise the range of possible outcomes for this particular business is huge – I contemplate a range of stories and probabilities ranging from management quickly burning through fast dwindling cash flow unsuccessfully trying to plug the hole from a failed trial scenario to an increase from a current 2% penetration to 40% penetration over time with positive results and management using rivers of cash flow profitably (R&D and acquisitions) to leverage their distribution channel.

 

[luutzu]

Most important growth figure is Dose Sales.


I’m not sure reverse engineering a single market implied growth rate out paints the whole picture as this company's future is pretty diverse depending on the outcome of some pretty major trials reporting over the next few years. Probably better having a positive outcome value, a negative outcome value and a probability assigned to both – pretty hard to reverse engineer three variables.


However for the exercise and giving you the assumptions I need to make to isolate dose sales as the implied variable.


Implying rate of scale benefits declines over time from historical. Which is conservative as they have a large current excess manufacturing capacity in place in case of positive trial outcome. Trials expenses are a known upfront expense that will come to an end. Also Nothing has come of R&D spend to date so this assumption also implies that they continue the same level of R&D and nothing ever comes of the investment.


On top of implying no scale benefits, I’ll make the assumption that fixed expenses increase quicker than revenue and brings return on equity down slightly over time.


Implying no other profitable use for the excess cash flow beyond funding the implied growth rate. So payout ratio goes up accordingly.


@ 10% after tax discount rate, A dose growth rate of ~5% would solve my valuation model at current market price.


But once again let me just emphasise the range of possible outcomes for this particular business is huge – I contemplate a range of stories and probabilities ranging from management quickly burning through fast dwindling cash flow unsuccessfully trying to plug the hole from a failed trial scenario to an increase from a current 2% penetration to 40% penetration over time with positive results and management using rivers of cash flow profitably (R&D and acquisitions) to leverage their distribution channel.

Keep it Simple, Smarty Pants.

Current price of $15.84 implies a growth forecast (expectation) of about 4.2%p.a. over next decade.

Note how very close this is to the recent release from SRX of 5.6% global growth for the last six months, and around the edges of your sophisticated models?

Note that at the previous $30s to $40 price range of previous couple years, the market implies (expect) growth in the 15 to 20%p.a. Hence, any decline will bring a whole lot of disappointment.

But at 4% growth expectation... unless some company managed to cure liver cancer, and we all hope that someday there will be one, but unless that happen, SRX is not going to grow at this single digit rate. Not when it's about to launch into Asia big time... note that APAC delivered 10.2% growth, slightly above expectation.

Historically...

growth has been in the 20s to low 30s p.a.

So while our Gilman might have sensed the sales decline, might even believe that the upcoming test results will disappoint... will the company's business really shrink from the 20s to the 5s due to those new R&D (misad)ventures?

Not trying to be too clever since all these are what I reckon Graham was teaching... but we're in the investment business, not the accounting and appraisal business. (hey that's a good line )

 

[galumay]

....But once again let me just emphasise the range of possible outcomes for this particular business is huge....

Great and thoughtful reponse, craft. I think it highlights the difficulty of valuing different businesses in different sectors. Developing pharmas are probably some of the most difficult, zero to infinity the range of possibilities!

As well as valuations I think one needs to keep a sharp eye on management and look at their level of experience and expertise in the field, and the capital management of the business given the large appetite for R&D in the sector.

I have never looked very closely at SRX so I cant comment other than in general terms, but these sort of businesses tend to be quite exciting to own!

 

[DeepState]

Thanks for your thoughts Craft. Much appreciated. It's good to learn a little about how you think about such situations. Scenario oriented, dcf, with probability attachment is just great. Best practice framework.

Only if you are prepared to answer further questions:

1. Have you materially varied your distribution of likelihoods arising from difficulties facing management right now?

2. How do you go about assessing likelihoods for trial successes?

 

[craft]

Thanks for your thoughts Craft. Much appreciated. It's good to learn a little about how you think about such situations. Scenario oriented, dcf, with probability attachment is just great. Best practice framework.

Only if you are prepared to answer further questions:

1. Have you materially varied your distribution of likelihoods arising from difficulties facing management right now?

2. How do you go about assessing likelihoods for trial successes?

1. I have factored in more downside mainly because the last dose sales numbers are beyond statistical noise on the downside. Many possible causes for that, but it clearly generates from the Americas having its first hiccup and being the main contributor to current geographical mix. No coincidence it occurred with changes to head of America's management in my view.

Sacking Wong is mainly noise for me, he had kept good custodianship of self funding the business and front running production capabilities but the business needs something else now. It's sad for him it ended this way, probably some hubris from being atop something successful, some misjudgement in mixing personal finances with corporate responsibilities but mainly a lesson in overstaying for the whole board I suspect. One possible problem is attracting the management calibre possible which would be attracted by a good trial result prior to the result. Get the right person and my upside goes up. Wrong person and it goes down - whilst it's unknown widen both ways.

2. Add one part reading/research, one part thinking and mix together with some SWAG.

 

[DeepState]

mix together with some SWAG.

...learned something today. Thanks for taking the time to provide a response to my questions.

 

[mcgrath111]

Down she goes. Seems people arent too fond of the new CEO, however maybe some profit taking from the bounce @ 14.

Ive always had a fondness for SRX, however wong and results just doesnt settle well for me at the time being.
Will look again if we enter 13 territory.