The Sirtex Medical Limited (ASX: SRX) share price could be volatile today, after the company announced major write-downs to its R&D assets and confirmed its guidance for the full year. Here's what you need to know:
- Intangible clinical and R&D assets to the value of $90 million pre-tax will be written off, a non-cash impairment which will nevertheless impact statutory profits
- Full year dose growth guidance expected to be around 5.5%
- Constant-currency earnings before interest, tax, depreciation and amortisation (EBITDA) expected to be $72 million before one-off items
- Staff headcount to be reduced 15% at a cost of $5.3 million
So What?
Due to the results of the SIRFLOX/FOXFIRE and SARAH/SIRveNIB studies not being successful, Sirtex's R&D impairment reflects the fact that funds invested in that research (which is counted as an 'asset' on the balance sheet) are now effectively worthless. This was already known, but is part of the new CEO's way of clearing the books and refocusing the company on his strategy.
Management is cutting R&D expenditure and clinical staff numbers to reduce costs and focus solely on the selling of SIR-Spheres, their primary product. The Chief Medical Officer, Dr David Cade, also seized his chance to depart after 14 years with the company.
Now What?
Fortunately, Sirtex has a strong balance sheet with minimal debt, and can weather the costs. However, today's update marks a step-change in the company's operations with it increasingly focused just on selling SIR-Spheres rather than also developing additional treatments.
This is a change from previously, where I felt that the company's R&D prospects made it a '10-year story' due to the time it takes for research to come to fruition.
Sirtex does appear to have plenty of room to grow, with just 12,000 dose sales per annum and an estimated market opportunity of 184,000 patients. However, many of these patients aren't reimbursed for SIR-Spheres and my view is that Sirtex's growth prospects are lower than might appear just from looking at these numbers. Sirtex also faces fierce competition from UK company BTG and its Theraspheres.
In my opinion today's news heightens the company's risks from a long-term perspective, although I am optimistic about the new CEO and continue to hold my shares.
