Shares in Sirtex Medical Limited (ASX: SRX) dipped slightly today after the ASX hit the company with a 'please explain' over the timing of its recent downgrade.
The ASX's head of Listings Compliance division wanted to know for sure whether Sirtex had complied with its continuous disclosure obligations.
What really jumped out at me about today's announcement was that the ASX questioned Sirtex in confidence as early as December 2 about whether it stood by its then guidance. Below is an extract:
"Following a tip-off, ASX's discussion with SRX on 2 December 2016 querying whether the double digit growth guidance for dose sales was still current and SRX's confirmation that the guidance was current…".
Sirtex stated that it had completed its 6-month planning review on the 5 December, and that this was presented to the board on 6 December. Further work was required by the board, and the updated paper was circulated to the board on the afternoon of 8 December. The downgrade was announced the first thing next morning on 9 December.
Share price falling prior?
Interestingly, Sirtex shares declined from 2 December to 9 December (while the market gained strongly), although not in the same way that characterised some other suspect company announcements recently.
However, I am very curious about who or what tipped off the ASX as early as 2 December.
What about the business?
Putting aside the ASX's query and market concerns about Sirtex's transparency for a second, investors also need to look at the business.
Part of the reason that Sirtex downgraded its forecasts appears to be competitive pressure. Fairfax media also quoted an analyst at Wilsons who stated that another drug, Lonsurf – which is not a direct competitor – can nevertheless delay the usage of SIR-Spheres by some time.
By now, Sirtex has a fairly solid scientific mandate for using its treatment. It is currently used as 'salvage' therapy after initial liver and colorectal cancer treatments are unsuccessful. Although Sirtex has good data to back up usage of its SIR-Spheres treatment, the salvage market is small.
Increased competition could crowd the market pretty quickly, while more prevalent usage of a drug like Lonsurf could also delay patients from entering Sirtex's sphere of influence. What Sirtex is aiming to do is move its SIR-Spheres 'higher up' the treatment chain, where it can be used earlier instead of later in the process. This should give it a much larger market. Sirtex is expecting to report important clinical trial results in this area early next year.
Delays to product reimbursement have also affected product growth. Given that Sirtex only sells some ~11,000 doses per year, any delay in any region could meaningfully impact sales growth.
Clinical trials and convincing governments and health boards to hand over money is sort of a cross between watching paint dry and pulling out fingernails, and is an implicit part of an investment in Sirtex. This is one of the reasons I have written previously that Sirtex is a 10-year company.
Sirtex has had negative outcomes before, like in early 2015 when shares crashed from $36 to $20. Although not ideal, based on what I have said above, I haven't seen anything thesis breaking.
But earnings are falling?
Where I do get concerned is the lack of information regarding why earnings are falling, if dose numbers are still growing. Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) is expected to be down 12%, despite forecast dose sales growth of 4% to 6%.
If dose sales, a proxy for 'revenue' are up, why are earnings down? There's obviously been a drop in margins or a great leap in expenses (for example, an increase in marketing) in order to make sure the company achieves 'double digit' dose sale guidance – yet I couldn't find any explanation for this in the company's recent announcement.
I continue to hold my Sirtex shares, but this event has shaken my faith in the company.
The company has also promised a stronger second half. Given that management went to great lengths to point out how limited their view of the future sales trajectory is, this forecast comes across rather hollow.
It also adds Sirtex to my list of second-half superstars, which is not the best list to end up on.
