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Sirtex Reaction Overdone

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Sirtex Medical (SRX) issued a disappointing first half update as increased competition has driven a wedge in dose sales. Dose sale growth is now expected to be in the order of 5-11% and earnings are forecast at $65-74m compared with previous expectations of double-digit sales growth and earnings of $90m.

There is increased competition for patients with liver directed therapies, a new drug approved in salvage for metastatic colorectal cancer and restrictions on reimbursement. The company's closest internal radiotherapy competitor, BTG, has clearly taken a share, CLSA observes.

BTG is able to offer a more complete solution to intervention radiology for patients with advanced liver cancer versus the Sirtex Medical offering, and this is putting pressure on the company's various trials to come up with superior results. CLSA believes the company should still be able to achieve double-digit volume growth in FY17 and high single digit growth beyond that.

The stock is now considered oversold as the implications in the current share price are that upcoming clinical trial results will be unsuccessful. CLSA, not one of the eight stockbrokers monitored daily on the FNArena database, retains a Buy rating and $26 target.

Bell Potter, also not one of the eight, does not change its long-term outlook for the company's therapy in the treatment of various liver cancers. The broker considers the relative movements in dose sales and earnings clearly demonstrate the leverage the company has to revenue growth.

Each dose sale in the US generates $22,000 in revenue at an 85% gross profit margin. As a result, small movements in dose sales growth have greatly amplified the earning impact. The broker notes the new chemotherapy drug in the salvage space is Lonsurf, from the Japanese company Taiho Oncology. This drug provides a survival benefit of 1.8 months in salvage level patients versus a placebo.

Bell Potter is of the view that the eight-month extension in liver-only, progression-free survival, as measured by the SIRFLOX trial, stands a reasonable chance of creating a survival benefit, if not in the general population then in the liver only and liver-predominant group.

Bell Potter maintains a Buy rating, which remains absolutely dependent upon a survival benefit for a significant group of patients in the upcoming clinical trials due to be reported in 2017. The broker's FY17 forecasts for earnings per share are downgraded by 34% and the price target is reduced to $30.00 from $42.26.

The downgrade was a significant reduction to Macquarie's expectations. The source of the disappointment lies with the Americas, Europe, Middle East and Africa (EMEA). The company is anticipating first half growth in dose sales of 4-6% in the Americas and 2-3% in EMEA. These levels were well short of Macquarie's forecast.

Asia-Pacific is the strongest performing market, tracking in line with expectations and has clearly benefited from the reinstatement of distribution in South Korea. The main element of concern is the US weakness, as historically this has been the growth engine.

While the company called out increased competition in liver-directed therapies such as Lonsurf, Macquarie believes the majority of the weakness is more attributable to the imminent release of overall survival data, which is driving patient deferrals.

With FOXFIRE, SARAH and SIRveNIB set to report data in the first half of 2017, clinicians may be hesitant to refer a patient for SIR-Spheres, given the short-term potential for a negative read out.

Macquarie anticipates only a modest improvement in the second half. Ahead of the data releases, the broker forecasts a compound growth rate in earnings per share of 14% over the next five years with, which is considered attractive for a company that is trading well below its biotech peers.

UBS re-sets its FY17 estimates on the basis that US sales are expected to slow. EU first half growth is expected to be 2-3%. German funding has been limited, although elsewhere access has been expanded.

While the company cited Lonsurf as having an impact, having been inserted into the therapy cascade, the broker highlights that for some patients in the salvage setting, it is not a substitute for the Sirtex therapy. Some patients may schedule the Sirtex treatment slightly later, or some deaths may occur on Lonsurf before the Sirtex treatment is administered.

Yet, given a survival rate of over nine months on Sirtex therapy UBS considers there to be no absolute substitute. Moreover, guidance implies normalisation of the Lonsurf effect. The broker considers the market correction after the trading update overdone.

The company has a track record of volatility when it comes to alternative, yet inferior, new therapy but a longer survival period tops all. Hence, UBS retains a valuation approach which is indifferent to the outcome of the trials and short-term volatility. Its price target relies on the free cash flow generated on existing indications.

FNArena's database shows a consensus target of $31.10, suggesting 85.5% upside to the last share price. There are three Buy ratings and one Sell (Morgans).

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