Fundie's Favourite

Fundie’s favourite – Platypus Asset Management on Sirtex (SRX)

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Jelena Stevanovic

What do you like about this company?

SRX is a medical device company that manufactures, markets and sells SIR-Spheres microspheres, a medical device used in interventional oncology.

SRX has approvals to sell SIR-Spheres in a number of key markets including the US, many European countries, Australia, as well as a number of Asian nations. SRX has had presence in these markets for over a decade; however, currently SIR-Spheres are used in a limited number of hospitals around the world and have only a very small market share.

SRX has done an excellent job of marketing and selling a novel therapy with limited clinical data, especially considering there is a mismatch between the referring and the administering physicians, which makes marketing difficult. However, SIR-Spheres are still only used as a last resort therapy, when the patient and the oncologist have exhausted all available chemo therapies.

The company recognises that further awareness and adoption of this therapy is contingent on better clinical data. It is therefore investing in five large scale clinical trials and the first of these trials, SIRFLOX, has just completed recruitment and is expected to report results some time in the 1Q of CY15.

SRX has demonstrated that the business can deliver significant growth, reporting overall growth in global dose sales in the 20%-25% range over the last five years, albeit off a small base. However, if the company reports successful clinical trial results, it will grow its addressable market by over 15 times, from approximately 30,000 salvage patients treated to date, to 480,000 liver cancer patients.

Therefore, SRX is in a unique position, as not many high growth companies listed on the Australian market are also only a couple of years from potentially expanding their addressable market by a double digit multiple.

What do you like about its management?

In the earlier part of its listed history, SRX had a few corporate issues; however these issues have been resolved and the current management, headed by the CEO, Gilman Wong, has continued to focus on delivering growth in its existing markets in a financially disciplined way.

In addition, SRX management has also shown commitment to expanding its addressable market.

How is it better than its competitors?

While the data collected by clinicians that have been using SIR-Spheres is limited, it does demonstrate encouraging overall survival benefits, when compared to other products currently available.

Unfortunately, sometimes inferior products have better commercial success if they are marketed more aggressively. One such example is a recently approved competing product, Stivarga® (Bayer Healthcare Pharmaceuticals) that has a small overall survival benefit and terrible side effects.  Bayer has managed to generate US $47 million in just three months. It took SRX over 10 years to generate that level of revenue.

This example demonstrates that effective marketing strategy is crucial to the success of a product. SRX has shown that management is aware of what is needed to expand the addressable market for its key product by investing into large-scale clinical trials. However, the company is yet to demonstrate that it can run an effective marketing strategy and maximise this new market opportunity.

How long have you held SRX?

We initiated our position in 2009 after the company delivered a few quarters of strong growth, and held a substantial position in the company until April 2013. We sold down our holding following a deceleration of dose sales growth in its key markets.

At what point would you buy it back?

We would consider re-initiating our position if we saw a reacceleration of dose sales growth in the salvage patient cohort to the previous strong double-digit growth levels, or after the company reports the results of the SIRFLOX trial.

What is your target price on SRX?

We believe that current price fairly reflects current market opportunity for SRX. However, SRX is on the cusp of significantly increasing its addressable market. If the company reports successful clinical trial results, as well as demonstrates that it can run an effective marketing strategy and carve out a substantial share of this new market, we expect the price to appreciate materially from these levels.

How much has it added/subtracted to your overall performance over the last 12 months?

Our holding in SRX has outperformed by 220bps since we initiated our position in 2009.

Where do you see the value?

The value will be delivered if the company reports successful clinical trial results and demonstrates that it can run an effective marketing strategy. SRX is facing some company transforming decisions and a lot depends on the strategy the management implements.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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