Last Friday cancer treatment specialist Sirtex Medical Limited (ASX: SRX) came out with probably the worst market update I've seen in more than 10 years covering (investment grade) companies in the UK and Australia.
The announcement felt more like reading an obituary than a trading update, with the CEO revising down expectations for full year dose sales guidance on the basis of rising competition in its core US market and declining public funding support in Europe.
This just five weeks after the CEO himself sold $2 million worth of shares (around 27% of his direct holding), apparently unaware that his own full year forecasts would need to be downgraded (just over 5 weeks later) from "double-digit" growth to growth of 5%-11% based on hopes for a stronger second half.
The magnitude of the downgrade in such a short space of time resulted in the share price collapsing in half straight after the revised guidance was announced.
Notably, or conveniently, the top end of the revised full year guidance is just in the "double digit" range previously forecast, and I expect management will feel under big pressure to achieve this guidance given the recent history and the fact that management's actions are already being queried by the regulator.
The shock downgrade was blamed on rising competition in the form of new orally administered drugs and other "alternate" trans-catheter therapies now used by North America oncologists, while declining public sector funding support in Europe was cited as another issue.
At the end of June 2016 the company's President of the Americas Region also left the business, with the Head of Asia Pacific also jumping ship in the last financial year. Subsequent to the US boss's departure dose sales in the key North America market are now expected to be up just 4%-6% for for H117.
A cost blowout has already been flagged in the first half with EBITDA expected to be down 16% to 9% over the prior corresponding period, and down 12% to flat for the whole year.
This despite the forecasts for 5%-11% dose sales growth at now higher reimbursement rates, with the company also referencing that "it continues to invest" ahead of its clinical trial results next year. One of the few things the company looks to have in its favour is its strong balance sheet.
Market share losses?
The fact that Sirtex's sales growth is decelerating sharply in what is supposed to be an underpenetrated and growing market suggests it's losing market share and with costs ballooning the outlook is troublesome.
Company's losing market share can increase operating expenditures to lift sales, but this may have a bad effect on the bottom line and the consequences of this may already be surfacing in the latest announcement.
The real red flag though is that the CEO sold shares just over 5 weeks before revising dose sales guidance downwards, apparently unaware that dose sales expectations would change so quickly.
This suggests, among many other things, that there's nothing to mean that dose sales guidance could not be revised downwards again in just over five weeks' time and that analysts' revised forecasts may again prove to be hopelessly optimistic.
Just this week another company in Bellamy's Australia Ltd (ASX: BAL) is locked in a trading suspension (and facing a shareholder class action) with many analysts expecting it to reveal a second downgrade in a matter of weeks, after its own chief executive sold a huge amount of shares in August prior to an earnings downgrade.
Unsurprisingly, Bellamy's like Sirtex (today) has been hit with a please explain notice around its continuous disclosure obligations and those under the general financial services laws in another red flag of trouble ahead.
Below's a summary of some of the red flags for Sirtex investors:
- CEO dumping shares
- Company has a single product
- Appears to be losing market share
- Fast rising costs
- Just days prior to downgrade the company chose to present on potential new products including one expected to hit Phase I trials soon
- Dose sales growth appears to have fallen sharply in November
- In response to regulatory query on Dec 15 company stated "Sirtex's business has a very short sales cycle, measured in days. As a result there is no transparency on dose sales beyond a very short window"
- Company's dose sales forecasts to period ending June 30 2017 are skewed to a stronger second half
- It appears that Dr Pangloss may be covering Sirtex at some of the brokers, with analysts' forecasts proving far too optimistic in the past
- Some of analysts' forecasts are based on success of upcoming clinical trials
- Head of key Americas market left the business at end of FY16
- Company flagging increased competitive pressure
- Company now under regulatory scrutiny
In my opinion buying Sirtex stock now is only for day traders, the gullible, or misguided, as the company's forecasts have only slightly more credibility than its CEO.
The kicker is that its shares still trade on expensive valuations relative to the wider market.
Selling for $16.80 Sirtex trades on around 20x expectations for earnings per share of 82 cents in FY17 if you assume EBITDA is down in the region of 12%. Or on around 18x FY16's trailing earnings per share.
This looks far too expensive and in my opinion the stock is a clear sell, with multiple warning lights flashing.
