After writing about Sirtex Medical Limited (ASX:SRX) in the January 23 edition of the Switzer Super Report, its share price is now hitting all time highs at $15.70 per share. As a reminder, Sirtex is an Australian-based medical device business and its core product, known as SIR-Spheres, has been refined over the years to deliver a highly-focused radioactive dose directly to liver cancers (Hepatocellular Carcinoma, or HCC as it is also known).

The story so far

HCC is the most common form of liver cancer, with 600,000 cases diagnosed each year; 19,000 in the US, 54,000 in Europe and 390,000 in China, Korea and Japan combined. The incidence of HCC is increasing due to increased rates of chronic infection with Hepatitis B and Hepatitis C in Asia, as well as other factors, including iron overload, alcoholic cirrhosis and some congenital disorders in the developed world.

While chemotherapy has been the gold standard of treatment for the disease since the 1960s, use of SIR-Spheres is slowly gaining traction, and Sirtex has recorded 38 consecutive quarters of growth in dose sales. The volume increases since 2011 are illustrated below.

Montgomery is looking for sales of 8,500 doses in the year to June 2014, an increase of 1,200 or 16% year-on-year, and with an average selling price of around A$14,700 per dose – revenue should approximate $125 million.

The future

Can Sirtex achieve the aim of moving from salvage therapy to first and second line treatment for liver cancer sufferers?  With Sirtex dosage rates growing at an average of 20% over recent years, management has taken the logical step of spending $60 million on five separate studies over a four to five year period to support this ambition. If successful, we are convinced the addressable market for Sirtex is at least four times, and hence annual revenue of $500 million is a possibility.

The SIRFLOX trial of 532 patients focuses on whether, in conjunction with Roche’s Avastin (US$5 billion per annum of revenue), there is greater survival rate for first-line treatment of inoperable liver-only or liver-predominant bowel cancer metastases. This study, which is being conducted in 100 sites globally, is expected to be released in early 2015, and will coincide with the expansion of the manufacturing facility in Boston and the construction of the new facility in Frankfurt. Combined with the Singapore manufacturing facility, the available capacity (assuming two shifts per day, four days per week) would be around 35,000 doses, or four times the current annual sales.

Three other studies, FOXFIRE (490 patients in the UK), SARAH (400 patients in France) and SIRveNIB trial (360 patients in Asia) are well advanced in their recruitment and the results should be available in 2016.  According to Professor Valerie Vigrain, head of radiology at Hospital Beaujon in Paris, there is an opportunity to ultimately combine a number of these studies into a much larger one, comparing the response at the many different stages of primary liver cancer.

A new standard

Assuming these results confirm the survival rate of SIRT – Selective Internal Radiation Therapy – which is crucial to the Sirtex investment case – the final question is the speed in which the technology is taken up by the interventional radiologists? For context, the 8,500 doses per annum represent little more than one per cent share of the annual incidence of primary liver cancer.

The ability and the time it takes to shift the thinking by these medical practitioners from chemotherapy, as the gold standard, to possibly include SIR-Spheres, will be crucial in any investors’ assessment of Sirtex. At a recent Selective Internal Radiation Therapy Conference in Rome, the vital statistics were heading in the right direction in terms of medical oncologists either using SIR-Spheres or believing SIR-Spheres could be elevated from salvage situations to potentially first- and second-line treatment.

While medical science tends to be a very risky pond to fish in, we are quietly confident the aforementioned medical trials will support Sirtex’s transformation into a much larger business.

(The Montgomery Fund and The Montgomery [Private] Fund own shares in Sirtex Medical Limited.)

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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